How Does Invoice Discounting Help My Cash Flow?

The Businessman’s common dilemma – “How can I improve my Cash Flow?”

The answer may be far easier than you think, even if your Commercial Banker has said that he cannot assist you further.

Invariably Commercial Bankers are very conservative anyway and they do not think further than offering you an overdraft that more often than not does not help YOUR growing business.

Then someone starts talking about discounting your invoices that are due and payable at dates in the future.

Actually this is a very good way to raise Working Capital for your business because:

• As the Financier pays you out for ALL your invoices, your business already is ‘in the money’ so to speak to enable you to pay all YOUR creditor accounts on time, to the tenets of the terms stated in the invoices by your Suppliers.
• What a boon to you is that?
• But not only that, because the Financier buys your invoices on an ongoing basis you will find that you have enough money to pay your wages on time, every time and have money left over to keep the roof over your head and feed, clothe and educate your family!

As A Buyer: How Can Invoice Discounting Help My Cash Flow?

The Buyer’s Great Dilemma!

Let’s see what we can do to help him!

What Mr. Buyer needs to do, figuratively speaking, is to pile up all the invoices that require to be paid (his Creditors) and take them to a specialist Financier and ask him, “Sir please won’t you buy these invoices from me, and pay all these Suppliers who are pestering me for payment? – Then what I will do is that I will pay you in 60 days time, once all my Debtors (those that owe me money) have paid me?”

The Financier thinks about it, likes the Buyer and decides to help him by buying the pile of invoices off him!

What happens here is that a ‘financial load’ has been taken off Mr. Buyers shoulders.

The Financier simply pays the Buyer’s Supplier invoices, and the Financier waits for Mr. Buyer to pay him in 60 days time, as agreed!

So what has happened here?

Mr. buyer’s Cash Flow has received a shot in the arm, and all his suppliers have been paid.

Mr. Buyer is certainly a happy chappie! – Because his Cash Flow problem has been alleviated entirely, and he is ‘in funds’ so to speak to continue his business effortlessly.

Mr. Buyer has the money to pay his wages on time.

Mr. Buyer has the money to keep the roof over his head, to feed, clothe and educate his family.

Just because he, Mr. Buyer thought about the Invoice Discounting financial service.

Back to reality

Mr. Buyer could well be aware that certain of his Suppliers were Discounting their invoices due and were paying him on time every time.

Yes, Mr. Buyer could have considered doing the same thing, he could Discount his Debtors in the same way, raising Working Capital ust as some of his suppliers are doing.

The Financier, in this instance has had a choice, he could simply Discount the invoices that are due to the Buyer, or, he could have purchased the buyer’s invoices due.

Summing up

This article shows how flexible Invoice Discounting really is. It all depends how the Financier wants to proceed as he sought to help Mr. Buyer and what Mr. Buyer thought was the in the best interests of his business.

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What Is Invoice Discounting?

It is just true to say that many businesses are not even aware what Invoice Discounting is, never mind how this financial service can help any importing, manufacturing business dealing with the distribution of goods and services.

In this presentation we will just focus on what Invoice Discounting is in the concept of Modern Working Capital Techniques.

To help us we need to understand a few basic terms that are in the glossary below.

Glossary

Invoice: The document that covers the delivery of goods and services to creditworthy buyers as they move from Supplier to Buyer.

Copy Invoice: Is an electronic copy of the Invoice that flows through the Modern Working Capital Management system to create the Working Capital that a Supplier would seek.

The Financier: This could be a Division of a bank or specialist Finance House that provides this kind of finance.

Non-recourse Discounting: Here the Financier takes all the risk in the financing transaction.

With Recourse Discounting:

Here the Financier has the ability, as expressed in the Invoice Discounting Agreement, to seek payment from the Supplier should the Buyer fail to pay the invoice due on the stated date.

Retention Account: This is the amount retained by the Financier as he finances the transaction as a part safety net pending the Buyer paying the amount due. The Retention Amount is repaid to the Supplier, less the Discounting Fee and Interest Due, as the Buyer settles the transaction.

Elements of Cost

The Discounting Fee: The Financier will make a charge in for arranging the Working Capital that is being provided.

The Interest Component: This amount is calculated on the number days that the invoice will remain unpaid at prevailing Interest Rates for transactions of this nature.

These cost elements are not excessive, and the reasons for paying them are far outweighed by the benefits that a business gains in raising Working Capital in this way.

The Procedure

The easiest way to understand the procedure adopted in the process of raising Working Capital in this way is by studying the graphic below and understanding the comments under it:

• The 1st Step is for the Supplier load all his unpaid invoices up onto the system. This is very easy to do electronically today. (In the old days this was a manual clerical chore!)
• The 2nd Step is that a copy of all future invoices that are raised will flow into the Modern Invoice Management System so raising ongoing Working Capital for the business.
• The 3rd Step is that the Settlement Platform contacts the Buyer to ascertain that the invoice is genuine, and due for payment. The Platform also ascertains the date that the Invoice will be paid and the bank current account that will be credited with the amount due. This bank account can, in need be controlled by the Financier.
• The 4th Step is that the Platform after receiving the confirmation validating the transaction then prepares the invoice to be offered to the Financier who can chose whether he wants to finance the transaction or not. In addition, in need, the transaction can be insured.
• The 5th Step – If the Financier decides to finance the transaction he debits the facility account in his books and credits the Supplier with the proceeds of the transaction less the Discounting Fee, Interest and the amount to be withheld in the Retention Account.
• The 6th Step – The Financier now waits for the Buyer to effect payment on the due date to the credit of the bank account stipulated. On receipt of this payment the Financier returns the balance that he holds in the Retention Account to the Supplier that would be less Discounting Fee and Interest charges.
• The 7th Step is to stand and look in awe as to how this Modern Working Capital Management System has worked to provide Working Capital to the Supplier!

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What Really Is Working Capital?

Could it be the air that can keep YOUR business afloat?

A Quick Look At Different Types Of Capital

Share Capital

This is the money that you (or the Founders of YOUR Business) put into the venture to get it off the ground, so to speak.

In the case of a company you would buy Shares in the company to achieve this end. If you retain profits in your company as it develops these profits supplement the amount originally invested. Losses of course would reduce the Capital amount.

Preference Share Capital

Instead of investing into Ordinary Capital of a business, an investor maybe wants the amount paid in to be secured somewhat. Therefore he purchases Preference Shares. This means that this category of shares is secured by a fixed asset like Land and Buildings, which now cannot be disposed of until the holders of the Preference Shares have been paid out first.

Loan Capital

Instead of buying shares sometimes an investor simply prefers to lend money to a developing business to secure the same ends as Share Capital would. In this case he foregoes the right in participating in the profits of the company by way of Dividends, instead he lends the money taking an interest on the amount invested, or he lends free of interest, with specific terms of repayment, or makes no such terms. The Investor can or prefer not to take some form of security from the company to give a sense of safety to the investment.

Working Capital – The Focus Of This Article

The various way that Working Capital can be raised:

• Supplier Credit: Many a time Supplier of the raw materials and/or products that you need to to ‘finish’ your business offering could be prepared to sell to you ‘on account’ – this means that the Supplier will deliver the goods you need but only require you to pay in 30, 60, 90 or 120 days time. . . . . This is a very popular way of raising Working Capital for your business.
• Bank Credit: A business can apply to a bank for assistance to help the business on its way. Usually what a bank does is to expend a bank Short, Medium or Long Term Loan to the business, or provide the business with an Overdraft Limit allowing the business to overdraw its bank account up to a specific limit. These facilities are usually secured by Directors Guarantees supported by Fixed Deposits held by the directors personally, or their Stocks and Shares that they own, or other Fixed and moveable assets that a Director/s own.
• Factoring or Invoice Discounting: What happens here is that Working Capital is raised from the Sundry Debtors in a company (i.e. from the unpaid invoices a company has issued to its Buyers who will/should pay at a future date. Typically here a bank or finance house buys businesses outstanding invoices, so providing the applicant business with an injection of Working Capital enabling it to continue operations. Not only that the Finance House also undertakes to purchase the future invoices in respect of goods sold and delivered to Buyers. 
• Invoice Financing: This is a facility that some banks prefer to use instead of buying the invoices from a business, their agreement with the applicant is that they will lend funds to the business’ Debtors by controlling the facility through what we call today Modern Working Capital Techniques. Ideally, while banks now use their existing systems many will swing toward the newly created platform that facilitates the creation of Working Capital as time passes. Details in the Resource Box below.
• Reverse Factoring: This facility helps a business pay its Suppliers early. This means that a business can proceed with the knowledge that some or all of its Suppliers can be paid early, and that he does not have to worry about continuation of his sources of supply. Not only that the applicant business does not have to keep administration staff on to answer the perpetual requests for early settlement of outstanding amounts due to Suppliers.

Who today provides these Modern Working Capital Techniques?

Some Divisions of banks and specialist Finance Houses do. However, they tend to specialize in one or two of the services.

A really Creative Financier would work in this way:

• He would do a thorough assessment of YOUR business, looking at all aspects of it and help you decide what really are the best Working Capital solutions for you.
• It is the appropriate solution that will help your business fly!

The way to find out the answer to this question is by contacting us on +27 83 417 0319 or Email nevillesol@icloud.com

To learn more about us click the link: https://mailchi.mp/12cd7f616222/tikvah

To learn more about our coaching programmes and which one is the right fit for you or your organisation, click any of the below links:

DISC Insights

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How to choose a businessloan: 5 factors to consider

When shopping for a business loan, many entrepreneurs make the mistake of focusing solely on the interest rate at the expense of other factors. While the interest rate is important when choosing a business loan, it’s not the whole story. You should be wary of surrendering too much control and flexibility for the sake of a few percentage points on an interest rate. Otherwise, any kind of setback may leave your business, and whatever assets you had to offer as collateral to secure that lower rate, at risk. 

Shop around to understand what’s available 

• Different banks offer different loan products. Key differences are often buried in the fine print. Look for the following information.

-What types of loans do different banks offer?

-What are the loan authorization policies and procedures? Who will authorize your loan?

-Are there specialized account managers for your type of loan or business? 

-These individuals can sometimes better appreciate and understand your business.

-Is your account manager willing to negotiate with you? For example, could you get lower fees and more flexibility on repayment terms?

Don’t just take a bank’s word for it. Tap into your network of business contacts. Ask them about their experience with a given bank, the quality of service, any problems they may have had, what was and wasn’t negotiable, and what the bank looked for in a loan proposal.

Before committing to a lender, you should consider the following five factors.

1. Loan term

How long a loan term is the lender willing to offer?

Longer terms mean higher borrowing costs, but that may be an expense you want to incur to ensure you don’t run into cash flow problems.

2. Loan size

What percentage of your project’s cost is your lender willing to finance?

This will determine how big an investment you must make and whether it makes sense to diversify your lending relationship with a second bank.

3. Flexibility

What is the lender’s flexibility on repayments?

As a business person, you know even the best plans can go awry due to unforeseen developments. It’s important to have a frank discussion with your banker about what would happen if you found yourself unable to make scheduled loan repayments. Would your bank let you temporarily suspend principal repayments, for example? It’s important to find out ahead of time, not during a crisis.

4. Collateral

What guarantees are being requested of you in case of default?

If you default on your loan, the bank can go to court to obtain the right to sell the collateral. This is always a last resort, because everyone loses in the process.

Collaterals can include your accounts receivable, pledges and liens (equipment and other fixed assets), inventory, real estate, personal guarantees and third-party guarantees. The type of collateral you offer depends on the nature of your business, the terms and conditions of the bank and the leeway you have to negotiate.

You should know what assets you risk losing in case of a default. This risk may extend beyond your business to include personal assets.

5. Financial reporting and covenants

What reporting and financial obligations is the bank requiring?

Most loan terms have financial reporting obligations requiring that financial statements and reports must be provided to the bank on an annual basis. Smaller loans typically have less demanding reporting requirements.

A covenant is an agreement between the bank and the borrower by which the borrower agrees to a series of conditions in order to get a loan. If a covenant is broken, the terms of the loan are breached and the bank could demand the entire loan be paid back.

For example, as part of a covenant, you might agree not to take out further loans or to maintain a certain financial ratio at a specific level.

Protecting your everyday cash

It’s important to negotiate a loan that fits your needs and those of your company. That’s why you should carefully consider when to borrow, how much to borrow and how fast you want to pay back your loan.

Many of these considerations have to do with protecting your company’s everyday cash—ensuring you can continue to fund the day-to-day operations of your company.

Concluding Comments

Remember what the BIG Secret is here, and that is you need to find and work with a Creative Financier who will assess your present Working Capital usage and point to a better, more economical way of doing things to the benefit of ALL Council or Association Members.

The way to find out the answer to this question is by contacting us on +27 83 417 0319 or Email nevillesol@icloud.com

To learn more about us click the link: https://mailchi.mp/12cd7f616222/tikvah

To learn more about our coaching programmes and which one is the right fit for you or your orbanisation, click any of the below links:

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