Growing companies tend to share one characteristic in whatever commercial sector the business trades, in brief there is always one difficulty that surfaces when a company becomes successful i.e. cash flow causes real working capital problems when money is tied up in credit sales. The traditional solution that a company usually turns to is a bank overdraft which can meet any cash deficit at least for short periods. However is an overdraft the the correct financial remedy for your company? Is a debtor finance solution such as factoring or invoice discounting a superior commercial choice to aid business growth? Here we investigate some key facts about the fitness of both options to determine suitability with regard to assisting with company growing pains.
The downside with a bank overdraft is easily identified, any overdraft ceiling set by your bank is strongly influenced by historical trading data, that is, prior years turnover, gross profits, net profits etc. The actual level will be set taking into account your banks current applicable lending terms. A bank overdraft can supply a useful addition to working capital, but how far can a company progress on a preset amount of cash from a funding option that is subject to withdrawal at any time, even if your company is impervious to general market conditions.
Alternative cash flow finance choices include products such as factoring and invoice discounting that exploit perhaps what is the sole asset for many businesses, i.e. invoiced trade debts. Debtor finance is an immediate commercial lending solution that automatically advances with company expansion. Higher sales on credit means more cash tied up in your clients trade accounts and your debtor book, those trade debts suffocate your cash flow!
Broadly speaking, invoice factoring and overdrafts have comparable overall costs in terms of pure cash, but when a business is faced with cash flow problems which option would be your preference? Regular appointments with a bank representative and having to re-explain your business circumstances, discussing increases to credit limits and possibly ending any meeting with inadequate funds to meet your working capital needs and probably having to do it all again in a few short months. Of course you could choose to make the most of your debtor invoices, no meetings, no time lost, just submit your accounts receivables to the factoring lender of your choice. Discount and bank your invoiced debts now and dynamically increase cash flow allowing your company move forward at a pace set by business growth and not someone else!
Read more about debtor finance at the Factoring Broker specialists.
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