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How invoice finance and trade finance work together

How you can close your cash flow gap by combining invoice financing and trade finance.

When assessing your business and its health, one of the most vital areas to look at is that of cash flow. Good cash flow management is essential to the best practice of any small business, and is made up of two key elements.

Firstly, maintaining the inflow of cash into your business through the sale of your product. Keeping this inflow consistent throughout the year can be a challenge. Difficulties can arise with payment lag from debtors, especially during times of financial hardship, and seasonal variations in sales.

Secondly, there is the outflow of cash from you to any suppliers, whether they be exporters of raw materials, subcontractors, or otherwise. Your ability to make these payments on time without digging into your capital is often directly affected by the inflow of cash mentioned above, however Invoice Financing and Trade Finance solutions can be viable alternatives. 

The trouble with a cash flow gap

The cash flow gap, or the long cash conversion cycle,  refers to a large discrepancy between these two factors: cash inflow and outflow. More specifically, it may refer to the scenario where the money you owe, or are a creditor for, exceeds the money coming into your business by a reasonable amount. Even if you have customers who owe you on an invoice, this credit may not actually be paid for a significant amount of time, and so the gap continues to grow.

The bills need to be paid though, and this can present a difficult choice. Dipping into their reservoir of working capital is a step many business owners have to resort to, however it is less than ideal. That money should ideally go towards business development and growth, and if it’s used up in plugging the cash flow gap, this becomes difficult. Using Invoice Financing and Trade Financing tools together may provide an effective alternative. 

What is Invoice Financing?

Invoice Financing, a form of accounts receivable finance, deals with the side of inflow. An invoice financing solution offers you quick and easy cash flow to immediately cover your outgoings. If you are owed funds by a client, and need payment quickly in order to cover costs, this might be a solution for you. 

An invoice financing company can usually provide you from 70% to 90% of your unpaid invoices within 24 hours of issuance. Once your client has paid their invoice the Invoice Financing Company will take their fee from the remaining amount to be paid to you.

This immediate payment frees up the business capital, which would have otherwise been used to pay your bills, to instead be put towards business growth. Often the potential profitability of this outweighs the cost of the associated fee.

This can go a long way towards addressing the issues of a cash flow gap, but only so long as you have the outstanding invoices in the first place. The maximum amount you can achieve through this is 70-90% of your net accounts receivable, which may not fully solve your issues.

What is Trade Finance?

Trade Financing solutions address the other side of the cash-flow-problem coin, where you owe money to suppliers but don’t have the revenue coming in at that time to cover it, or the unpaid invoices from your own customers. Your credit will be paid by the Trade Finance Company so as to preserve the supply chain of materials and products into your business, and protect your relationships with the suppliers that work with you. Paying suppliers on time ensures that you receive your orders on time and your reputation with them is maintained.

This can be a helpful solution, as a business’s costs are generally consistent but its sales may vary seasonally. You can keep your business capital working for you, pay your suppliers promptly, and account for your credit as your sales start to increase. If that capital is invested in ways that improve sales even further, then there could be positive times ahead for your business.

Bringing it all together

The best business owners will look at all of the tools available, and may sometimes use them in tandem to get the best results. Whichever of these services is most appropriate for you can often depend on where the hold-up in the cash flow chain is. Finding this can be a matter of keeping your financials up to date, and understanding your business intimately.

When you have a number of outstanding invoices but don’t expect them to be paid soon, then Invoice Financing may provide the answer. In times when sales are down, perhaps it may be more appropriate to use Trade Finance in order to maintain the supply chain. With the two services working together, businesses can address issues on both sides of a cash flow gap.

Here's an example of how Invoice Financing and Trade Finance work together

Scenario - Company X

Company X is a Sydney based wholesaler that imports stock from overseas and then sells to stores.

They place an order with the supplier. Their supplier requires up-front payment before the goods are shipped, and they could take a few weeks to arrive. Once the business receives the stock, it takes another few weeks for them sell their goods. All this means that depending on their payment terms, it could be weeks before they receive the payment for the order, which adds up to a very long time spent out of pocket.

Invoice Finance and Trade Finance can help fund this cash flow gap.

The Company X can use Earlypay Trade Finance facility to purchase the stock. Earlypay’s facilities don’t require Company X to make full repayment for up to 180 days, thus addressing the gap between having to pay for stock and having sold the stock to its customers. Once the goods are sold, Company X can use the Earlypay’s Debtor Finance Facility to unlock the cash tied up by the invoice raised to their customer for the same stock, thus addressing a gap between when the goods are sold, and the payment is received.

The business can then use the funds to repay the Trade Finance facility earlier than the due date and make other necessary payments.

Access to Trade and Debtor Finance facilities not only enables the Company X to manage their supply chain in an efficient manner but also provide the business with the ability to order bulk supplies and achieve substantial discounts from the suppliers. Company X will also benefit from quicker growth and sales due to the increased purchasing power; the finance facilities can offer.

This is an example of how a business in wholesale industry can take advantage of Debtor and Trade Finance facilities in order to close their cash flow gaps and grow their business.

Earlypay provides various business finance solutions, including trade finance and invoice financing options for businesses looking to close their cash flow gap. For more information, please contact our helpful team by calling 1300 760 205 or contact your broker or BDM.