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 CeFA CeFA CSP
20+ years experience in invoice finance
Invoice finance allows you to release cash from your unpaid invoices. The capital injection that comes from taking on invoice financing can greatly improve your business cash flow, and give you the platform to focus on running your business.
There are different types of invoice finance, the main 2 being invoice factoring, invoice discounting and selective invoice finance.
Let’s dive into how invoice finance can be used to increase your working capital and act as a contingency fund.
Why you need to have a contingency fund
Any business owner should make sure they have a suitable contingency fund in place to create a safety net should something unexpected happen.
Things don’t always go according to plan and when that happens, it’s important that you have the financial means to react quickly.
This can prevent you from running into major problems such as failing to pay staff, missing rent payments or failing to pay suppliers.
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 cash from your unpaid customer invoices, providing your business with a cash injection.
This gives you a financial buffer as you’ll no longer be waiting on customers to pay based on their delayed payment terms. This approach makes your business more cash flow positive and therefore better able to react to the unexpected. For SMEs in the UK, this is critical.
The pros and cons of this approach
The pros and cons of this approach are:
Pros
- You are more cash flow positive and more likely to hold a cash balance in your business bank account.
- When you take out invoice factoring (also known as debt factoring) you will have support with managing your sales ledger and help chasing payments.
- If faced with the unexpected you can generally react without facing cash flow problems.
- Improved cash flow can help to smooth out the ups and downs of running a business.
Cons
- Invoice finance does cost money, so consider the costs before applying.
- Finding the best deal can be tricky – although our unique comparison tool does make it easy.
If you choose a confidential invoice discounting facility, you won’t get support in chasing payments.
The alternatives that you could consider
If you’re not convinced by the idea of taking out invoice financing, or you’re just curious as to the alternatives, consider these options:
- Business overdraft – An overdraft is a strong option as a business contingency fund and can work well. That said, a business overdraft usually allows you to release less funds than would be possible through invoice finance and can be comparatively more expensive (depending on the deal you get).
- Business loans – A business loan allows you to raise funds, which are then repaid through regular monthly payments. This is ideal when funds are needed to fund a project, working capital or capital expenditure, but isn’t usually ideal as a contingency fund as it is borrowed and then repaid in a linear way.
- Business credit cards – A business credit card can act as a contingency fund in some cases, although this is generally more suitable for smaller amounts. A credit card can help when there is a small hiccup, but generally, the credit limit will be relatively low compared to other types of finance.
- Build a cash balance – If you’re able to build a cash balance without debt from your trading activities then that can be a good option for some companies. It’s free and a secure way to run your business, but can stifle growth as you’ll be moving slower than would be possible using an invoice finance facility.
How do I get invoice finance?
The easiest way to get invoice finance is through our online invoice finance comparison platform. You simply input what you’re looking for and your business details and sit back as lenders compete for your business – offering you terms through the platform.
Each lender only has one shot to offer you the best deal, meaning you’ll be getting their best terms without the need for endless negotiations.
