If you work in manufacturing, you’ll likely know about cashflow problems.
For firms in this industry, getting work tends to be the “easy” part – and not getting paid for the work they’ve already done is what leads to droughts in working capital.
Working capital is the amount of cash generated by a business (from sales, service revenues, or earned interest) against the amount of cash spent (through expenses, loan repayments, payroll or other overheads), over the same period.
Healthy levels of working capital are important for investing in things like human resources, R&D, and equipment; or on lowering price-points to remain competitive. On a more basic level, they are also needed to pay wages, fund production and keep the factory lights on.
Given its high overheads, working capital in manufacturing is especially important; but, paradoxically, it’s one of the worst industries in terms of claiming money its owed, studies show.
With wages and materials becoming costlier, the need for healthy working capital is also increasing.
As a result of these factors, many firms are learning towards invoice financing to keep funds flowing.
Invoice financing allows businesses to gain finance using their unpaid invoices as collateral, in place of more traditional assets like real estate.
Why is this helpful? Well, in short in makes getting a short-term cash fix or business loan – to offset lags in working capital – much quicker and easier.
These days, particularly after the Royal Commission into banking misconduct, banks are quite conservative when it comes to loaning funds.
Invoice financing takes into account the money you are owed, not just your business bank balance.
In doing so it gives a more accurate picture of your profitability and gives lenders the confidence – and authority – to loan you more.
It also beats burning up resources on chasing unpaid accounts.
Businesses can still be “profitable” even with a negative cashflow, if their revenue is tied up in accounts receivables.
In fact – with the average overdue invoice taking 26.4 days to be cleared – accounts receivables are often one of a business’ largest assets, particularly in manufacturing which is prone to late payments. This study found that even small firms are owed on average $13,200 at any given time.
Invoice financing allows you to capitalise on these assets and secure cash, quickly and easily, so you can invest in growth or fund business as usual.
Unlike other forms of business finance, which rely almost solely on income statements and more conservative measures of profitability, invoice financing looks at the bigger picture and increases the likelihood of a ‘yes’.
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