Cash flow interruptions can have dangerous knock-on effects on businesses by disrupting their operations, and sometimes also those of their suppliers. That’s because, by the time a business is aware of an impending budget shortfall, it often has to take extraordinary measures to come up with the funds it needs. Taking out loans can take weeks or months and businesses need solutions in time to make upcoming payments.
To deal with this problem, businesses are increasingly turning to alternative financing tools such as supply chain finance and invoice finance. These allow businesses to get the funds they need without time-intensive loan applications. Instead they give themselves an advance on their own income, or extend outgoing payment terms in order to manage cash flow. As a result, they can get the cash they need almost instantly, reducing time pressures while also making traditional credit easier to obtain.
Invoice finance helps businesses get funds quickly
Instead of going through a lengthy loan application process, businesses can use invoice finance to get cash in a matter of hours. This is done by submitting an outstanding invoice to a financial institution in exchange for most of its value in an up-front payment. The customer will then pay the financial institution instead of the business, at which point the financial institution will release the remaining funds.
In effect, this allows the business using this type of financing to give themselves an advance. If a different client is late on a payment, equipment breaks down, or another cost arises unexpectedly, the business can quickly and easily solve the problem. As a result, it doesn’t need to keep any additional working capital on hand to deal with potential problems. This is critical, as capital that’s simply sitting around is money that could (and should) be invested and earning revenues for the business.
Supply chain finance helps businesses to buy time
Supply chain finance can be used to extend a business’ supplier payment terms by up to 90 days from the date of invoicing. It’s an ideal tool for funding short term growth efforts, and to manage small cash flow interruptions, and it’s also uniquely well-suited for helping businesses to deal with much larger budget shortfalls. That’s because the function of supply chain finance is primarily to provide a business with more time before an outgoing payment needs to be made.
Businesses often need long-term funding solutions, such as traditional business loans or outside investment when it comes to dealing with larger funding issues. To find those, however, they need time. Supply chain finance allows them to do that by deferring some of their outgoing payments and keeping their operations running normally. This allows businesses to recover from possible serious issues, such as losing a major investor, or being denied an important loan by their primary lender.
Improve your business credit profile
Besides helping businesses to avoid financial hiccups and potential operational disruptions, supply chain and invoice finance can help businesses to access other types of financing. This is because they serve to improve a business’ cash flow management as a whole, while also helping them to keep a clean balance sheet.
By using these alternative financing tools, businesses can not only secure their own cash flow, but also that of their suppliers. A business that effectively manages its own cash flow interruptions is much more easily able to pay suppliers—and creditors—in a timely manner. Supply chain finance even allows businesses to pay suppliers early in exchange for a discount. This helps businesses to develop and maintain a healthy credit score, making it much easier to access credit-based financing when they need it most.
Invoice and supply chain finance are off-balance sheet
Businesses who use these types of financing to manage cash flow can also improve their ability to attract investors. That’s because both of these tools allow them to temporarily boost their available working capital without the use of credit. This way they can avoid taking on debt unnecessarily, keeping their balance sheet cleaner than it would be otherwise. This, in turn, serves as a signal to potential lenders and investors that the business manages its cash flow well, and that it is in good financial health overall.
Cash flow is inherently unpredictable in business. The only way to reliably deal with potential problems, then, is to adopt flexible solutions that can be implemented at a moment’s notice. Invoice and supply chain finance help businesses to do this in a way that protects them from smaller cash flow interruptions and, therefore, complements their long term financing efforts.