How To Use Invoice Finance As A Business Contingency Fund
How To Use Invoice Finance As A Business Contingency Fund
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Author: Gary Hemming CeMAP CeRGI CSP
20+ years experience in invoice finance
Invoice finance is a financial product that allows you to release funds from your unpaid invoices.
Cashflow is key to the success of businesses, and to create comfort that your cash levels will never fall too low, a contingency fund is vitally important.
Invoice finance, which can be broken down into 3 main types – invoice factoring, invoice discounting and selective invoice finance can act as the ideal contingency fund.
What is invoice finance?
Invoice finance is a type of business finance that allows you to release funds from your sales ledger – the invoices that have been raised, but not yet settled.
It acts as an ongoing form of revolving credit that allows you to release more money every time you raise a new invoice.
It is designed to speed up the cash flow cycle of a company and therefore increase its bank balance and how much trade it can handle.
What is a contingency fund and why is it important?
A contingency fund is a financial safety net that is in place to protect you against the unexpected – an unexpected bill, significant costs or even a great opportunity that will cost money to get up and running.
Consider the cost of missed opportunity or undue risk against your likely invoice finance cost.
As things don’t always go according to plan, it’s important to have the funds in place to react quickly.
Read more – What Are The Pros And Cons Of Invoice Finance? or What Are The Risks Of Invoice Financing?
How can invoice finance be used as a contingency fund?
Invoice finance allows you to release funds from your unpaid invoices, which will significantly improve your business cash flow cycle.
This gives you an immediate and ongoing financial buffer that can grow as your business grows.
By not waiting to be paid for work completed, your bank balance will always be significantly higher, and you’ll always receive funds within 24 hours of your invoice being raised.
As invoice finance can release up to 95% of the value of your invoices, it can provide a safety net.
This can be even further protected through the use of bad debt protection – an add-on that means you still get paid, even if your customer fails to settle the invoice.
It’s important to be prepared for the unexpected
Running out of cash is the one thing that will take your business down. Any other issue can be traded through, no matter how bad it is, as long as you don’t run out of money.
Having a strong reserve in place is the best way to protect your business against unexpected shocks.
Just saving money each month isn’t always the best way to achieve this, as holding back money can hold back the growth of the business, meaning you don’t hit your full potential.
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