5 Ways Invoice Finance Can Reduce Financial Risks

Untitled design.jpg

 

Most borrowers concentrate on the cost of borrowing. But there are other risks that should be considered when searching for suitable funding lines.

 

Market Risk

When you purchase an asset and borrow against it there is always the risk that assets could decrease in value.

If you fund against your invoices, the invoices you raised today should be worth the same amount in 60 days’ time.  Your invoices aren’t exposed to market forces.

Link the value to the borrowing.

Over Securitisation Risk                                                   

The borrower offers an asset of considerably higher value than the credit taken against the asset, such as using a $800,000.00 home to secure a $250,000.00 overdraft. Not only do they lose flexibility with future borrowings, but should the company fail, they have placed their personal wealth of $800,000.00 at risk.

By using the assets of the company to fund the business, this risk is somewhat mitigated. By using receivables to fund working capital and leases to fund equipment purchases through different funding providers, you maintain flexibility and maximise your potential to borrow should you require it in the future.

Link the value and the asset to the borrowing.

Certainty of Cashflow / Term Risk

With normal term funding, the borrower takes out a loan and then repays it over a 2,3,4,5 or 20 year period.

A lot can change during this term and there is no certainty that you will have the cash flow in the future to repay the loan.

In using Invoice Finance, you borrow against the value of your outstanding invoices and the borrowing is linked to your trading performance. It’s your debtors that pay off the outstanding amount.

Link the performance to the borrowing.

Cross Collateralisation / All Monies Risk

Many businesses find it more convenient to have all borrowings with the one institution. This can lead to a loss of flexibility as the institution now holds all available security through cross collateralisation. Changing lenders or releasing security becomes more complex and difficult. If the borrower hasn’t cross collateralised but hasn’t avoided the all monies clause then the effect can be similar.

By utilising a stand-alone Invoice Financier, you avoid both of these problems.

The borrower retains flexibility and a degree of control.

Link the security to the borrowing.

Over trading Risk

If you fund a growing business using normal lines of credit then potentially you can transact more business than the firm's working capital can sustain and risk failure. The more sales you have, the less cash you have, as it’s with your unpaid clients. Unfortunately, your suppliers still wish to be paid and their bills are getting bigger.

Using Invoice Finance, you borrow against the value of your receivables. The more you sell, the more you can borrow. You can pay your suppliers earlier and for larger orders this gives the ability to negotiate bigger discounts. Not only have you avoided over trading but you’ve also improved your margins!

Link the sales to the borrowing.

Potential borrowers should seek a suitably qualified commercial finance broker who can structure their funding lines and mitigate these risks.

Carlyn CordiComment