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What is cashflow finance and how does it work?


For smaller businesses, cashflow is often a difficult subject especially where the end customer is a large business or in the public sector.

As we hear from time to time in the media it can take a long time for smaller business to get paid causing them significant difficulty in the short term.

The good news is that there is help at hand for businesses that need to bolster their available resources.

Cashflow finance can help businesses when they have a significant future income stream that they would like to raise money on. It’s particularly useful for companies that contract over a medium term or that raise invoices to customers but need to give long payment terms.

A good example would be a recruitment agency that specialises in temporary staff. The contractors expect to be paid straight away but the client may demand at least 30 day terms or longer. This puts significant pressure on the working capital of the agency so to get around this they arrange to finance the value of the weekly invoices allowing them to pay the contractors immediately.

Invoice cashflow funding (also known as factoring) is based on the value of invoices submitted to customers. The borrower reports the value of the invoices submitted to the funder and they in turn advance a percentage of the value to the borrower.

Depending upon the agreement the customer will settle the invoice with the borrower or the lender. In the former case the borrower will repay the advance from the cash received from the customer together with a facility fee. In the latter case the customer pays the funder directly and they then pay the difference between the invoice value and the advance back to the borrower, again less a facility fee.

A funder who is considering lending on future cashflow will be looking for a series of things.

They’ll want to know the standing of the customer and the borrower and will also take a look at the nature of the cash flows. Are they regular such as subscriptions? Are they contractual and have written agreements in place? Are the values certain?

They will also consider the industry that the borrower operates in as some will only lend to certain sectors and taking all of the aspects of the transaction into account they arrive at the types of invoice they will lend on, the percentage of the sale they will advance and of course how much they will charge.

It’s important that when you are choosing a funder for your business that you look for one that will be able to fulfil a number of criteria.

Will they be able to make speedy decisions and payment?

Can the funder lend a high percentage of the invoice?

When the customer settles the invoice will the lender pay over the remainder quickly?

Do they charge a reasonable rate?

Cashflow finance can give your businesses working capital a shot in the arm and finding a lender that can give you the right level of support and the features you need is vital.

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