Companies looking for an immediate injection of cash quite often find that the quickest way to accomplish this is through invoice factoring or discounting. Although it seems like a relatively straightforward process, it isn’t as simple as it may sound. It all sounds fairly basic where the lender will provide up to a certain percentage, often as much as 85pc, of the accounts receivable on the ledgers. Unfortunately, there may be times when this can work as a disadvantage, putting a company further into a negative cashflow. That being said, Real Business Rescue will only recommend factoring or invoice discounting if it seems like the most beneficial way to inject money into your business without putting you further into the negative.
Factoring, Discounting and Accumulated Interest on Loans
When your cash flow is worse off as a result of factoring or invoice discounting, several factors could be the ultimate cause. The first thing to consider is that there are a great number of businesses in distress at the moment and if you are having problems collecting debts owed to your company, those debtors may be in distress as well. Yes, you did get a ‘loan’ against your books but will the factor be able to collect those debts and if so, how long will it take to do so? Keep in mind that there is interest charged on the amount of money you will be borrowing against your books and if it takes an inordinate amount of time to collect on those invoices, you may be paying more in interest than you had anticipated.
Invoice Factoring and Discounting vs. Bank Overdrafts
Another area which may be problematic is when a company has an overdraft account with a lender, typically a bank. In many cases the overdraft will be discontinued when a loan is taken against the books which might end up, as mentioned above, costing more than anticipated. Before seeking invoice discounting or factoring, take a good look at your overdraft account to evaluate which would be most cost effective in terms of cash flow. If the factor or your bookkeeping department (for discounting) has trouble collecting from your clients, the overdraft account might just be a more logical choice. This is why our insolvency specialists do a thorough analysis of your accounts before giving advice on which path to take.
When your cashflow is worse off as a result of factoring or invoice discounting, the problem is probably due to an inability to collect on outstanding debts. It’s as simple as that. This is why it is so important to know the difference between a turnaround specialist and a lender! A turnaround (insolvency) specialist will seek to find solutions to your cash flow problems that are realistic. Lenders obviously want to make a profit on loans. That is not a bad thing because, after all, every company is in business to make money. However, Real Business Rescue wants to help you find financing that will not leave you in even greater distress. Talk to our specialists with a free consultation so that we can help determine if invoice discounting or factoring are the best way to raise immediate funds for your company.
