Many businesses are not aware of the potential to release cash against their sales ledger. For every sale made, you have to invoice your customers for goods sold or services provided. Factoring.uk.net explains how resourceful your sales ledger could be in these economically demanding times.
Just like your business’ brand, the sales ledger is an intangible asset that generates value and contributes to growth. It is not the most obvious choice of an asset because it’s a record of sales you’ve already made.
Using your sales ledger
The sales ledger records a business’ regular sales – income receipts from the sale of goods and services. However, this income also includes money owed to your business. The assumption is that it will be in your interest to chase your debtors, especially slow-paying customers for payment.
It’s important for you to regularly record the total amount of sales invoices. By doing this, you will be able to identify and calculate the amount of debt owed to your company. Also, you need to save copies of the sale invoices as it could help you when tracking invoices for payment.
The modern SME will tend to trade on credit terms of up to 90 days. Imagine the financial impact this could have on the owed company?
Financing via Invoice Finance
Your business could have a comfortable turnover, with a high proportion of cash locked up in your debtor books. You would still have to pay out expenses and meet other financial requirements whilst waiting 60-90 days to get paid by your customers. This ‘wait’ could have a devastating effect on your cashflow.
How about a facility where you could release cash against your sales ledger? That is what invoice finance is all about. Your sales ledger is used as the principal security against which up to 90% of the cash could be released.
Invoice finance is a cashflow solution for any type of business – start-ups to established companies, regional to multi-national, lower turnover businesses to financial giants. As long as your sales ledger has invoices outstanding to other businesses, you could qualify for invoice finance.
Invoice finance is administered in two forms: factoring and invoice discounting. Both facilities release a pre-arranged cash advance on your invoices as soon as they are raised. The invoice balance, less any charges, is paid to your business once your customer settles their invoice.
The main difference between both forms of finance is that factoring provides an additional service of sales ledger management and debt collection. This makes factoring suitable for SMEs (including start-ups) that trade on credit with other businesses.
On the other hand, invoice discounting allows the business to mange its own sales ledger and chase customers for payment. Invoice discounting is geared towards the ‘larger’ businesses, with a projected annual turnover of at least £350k, as they have in-house debt collection systems.
Benefits of sales invoice financing
Your business benefits from accelerating its cashflow by up to 90% of the cash tied up in your sales ledger. You immediately gain access to working capital that can fuel growth into your business.
Unlike other traditional forms of finance such as bank loan and overdrafts, the credit rating of the applicant is not a major issue. Finance providers set their invoice prepayment percentage based on the quality of the outstanding invoice.
Whilst waiting on your customers to make payments, your business could potentially miss out on supplier discounts and offers. The funds released via invoice finance boosts your bargaining power with suppliers and enable you take advantage of early discounts.
Invoice finance is a flexible form of finance that grows in line with your business. This means the more invoices you raise, the more cash you could get. Should you require, bad debt protection could be offered.
This business advice article is written by Factoring.uk.net, the invoice finance experts.