Cash flow refers to the movement of money within a company. Cash flow can be defined as the sum of all accounts payable (outgoings) measured against accounts receivable (invoices).
To maintain a positive cash flow, you need more money coming into your company than going out, meaning that you can pay bills and invest in its growth without serious financial concern.
When a cash flow problem develops, a company owner has some crucial decisions to make. Luckily, there are several solutions out there to help struggling firms.
Types of Cash Flow Problems
Companies, particularly those engaged in international trade, can quickly develop cash flow problems. There could be many reasons for this:
- Receiving late invoice payments - Unpaid invoices are some of the biggest reasons for cash flow issues. Suppliers (Exporters) often have to agree on flexible payment terms with international Buyers (Importers), meaning it can be several months before invoices are paid.
- Long lead times - Suppliers must rely on their network to produce goods for export. The processes of production, delivery and payment must align with one another. If they aren't aligned and there are long gaps between each process, it can create a cash flow problem.
- High overheads - Monthly expenses can quickly add up and lead to months of expenditure without much income. In this scenario, companies often look to make cuts or find cheaper suppliers to prevent cash flow problems.
- Rapid growth - As a company grows, so can its spending. For example, if firms hire more staff and move into larger buildings, this will likely mean higher rental costs. While growth is encouraging, it's crucial to forecast income and expenses and ensure they align with the growth phase. Shortfalls can come from inaccurate cash flow forecasts or a lack of planning.
- Profit margins too low - Suppliers beginning in new markets face heavy competition. While it can be tempting to lower costs to attract Buyers, it's vital to ensure that there is a decent profit margin. If profit is too low, it can indicate that a firm must charge more for the sale. Otherwise, it could create a cash flow problem where costs outweigh profits.
- Restrictive financing facilities - Banks have restricted the help available to SMEs that require working capital, particularly those companies in the international trade sector which is seen as risky. If such a company obtains cash flow finance from a bank, it's often given extended repayment agreements with high interest. Many SMEs find banking assistance too time-consuming and difficult, and look for alternative solutions.
Financing Solutions to Improve Business Cash Flow
International traders can obtain cash flow financing solutions in a variety of ways.
- Invoice financing (invoice factoring)
Invoice financing involves a third-party finance company advancing money on unpaid invoices. This avoids cash flow problems caused by money being tied up for months in unpaid debts. The factor pays a proportion of the money up front to the Supplier and then passes on the balance (minus any service fees) later when the invoice is settled by the Buyer. The finance and costs are calculated based on individual invoice amounts.
- Short-term loans for working capital
Working capital loans help companies pay short- or medium-term operating expenses. These are loans that don't come with excessive repayment schemes. The lump sum helps the firm to solve short-term cash flow problems while it gradually repays the loan, usually over a few months. The amount of finance depends on many factors, including credit history and turnover.
- Lines of credit for small businesses
A business line of credit is a pre-agreed funding amount that can be drawn upon whenever required. Unlike a traditional business loan with fixed monthly repayments, credit line funds can be used when needed, such as for immediate expenses. Cash flow concerns can be eased by the knowledge that working capital is readily available. Secured lines of credit require assets as collateral for the loan. In contrast, unsecured lines of credit require no collateral.
Forfaiting is a specific trade finance service enabling Suppliers to sell invoices at a discounted price and receive immediate payment. Forfaiting and invoice factoring are similar but one key difference is that factoring provides a cash advance and the balance at a later date. In contrast, forfaiting can often cover the entire value. This helps Suppliers stay on top of their cash flow without worrying about non-payment from Buyers.
- Bank loans and overdrafts
Companies may turn to fixed-term loans or overdrafts to bridge the gap between income and spending. Suppliers experiencing liquidity or cash flow challenges would need to present information for the bank to consider a bridging loan. Trade loans can be used for pre- or post-shipment financing, so they're flexible options. The major drawback of these financing solutions is that it can often take months to be approved for a loan.
Cash-in-advance trading requires the Importer to pay cash to the Exporter before the goods are shipped. This type of financing provides security for the Exporter and eases worries about non-payment. However, while cash advances benefit Exporters, many Importers are reluctant to pay up front as it affects their cash flows. Importers could even begin switching to other Exporters willing to offer deferred payment terms, making it hard for exporting companies to stay ahead of the competition.
International Invoice Factoring Services
Companies experiencing cash flow problems can use one of the above financing solutions to bridge short- or medium-term financial needs.
However, as deferred trading terms and unpaid invoices are the cause of so many cash flow issues, many companies see solving such a common problem as the first step.
Invoice factoring is often a fast and easy solution for companies that trade internationally and have working capital tied up in unpaid invoices.
Using professional invoice factoring solutions, Exporters that trade internationally can receive:
- Finance that is approved in a few days or weeks, rather than months.
- Funds based on issued invoices instead of the company's credit history.
- Immediate working capital in various currencies, ranging from the thousands to the millions. An invoice factoring company will advise on the minimum and maximum amounts of finance it can provide.
- A significant advance on the total invoice amount - typically between 70% and 90% - with the balance (minus any service fees) transferred following settlement of the invoice by the debtor.
- Increased liquidity within the company providing opportunities for business growth.
- Instant funds with no long-term repayment plans.
- Fast cash after shipment of goods without the need to chase the Importer for payment. (NB. Available with non-recourse factoring, where responsibility for collecting payment from the Importer rests with the invoice finance company.)
Should You Consider Invoice Finance to Solve Cash Flow Problems?
Given the information in this cash flow guide, it's clear that fast and flexible invoice factoring can solve many cash flow problems. However, not all international Suppliers will benefit from invoice financing and some may find alternative financing more suitable.
- Invoice financing typically solves specific short-term cash flow worries caused by delayed invoice payments.
- Other types of business finance, such as loans, may be more suitable if a company requires new facilities or equipment.
- There is a chance that a Buyer may hesitate to pay an invoice factor rather than the Supplier, which could harm a trading relationship. Suppliers concerned about this possibility should explore undisclosed factoring.
- Some invoice factoring firms will offer only recourse factoring, which means the Exporter is liable for losses if the Importer doesn't pay.
- Furthermore, invoice finance is only possible in a trade deal involving different companies, meaning that it's impossible to apply for invoice finance if firms supply goods directly to the general public.
Therefore, Stenn recommends considering all finance options at your disposal to see which one works best for your specific cash flow issue.
If you are interested in learning more about invoice factoring, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
Check the financing limit available on your deal or go straight to Stenn's easy online application form.
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