Glossary

Confidential invoice discounting is one of the two main types of invoice finance. As the name suggests, this is an agreement that is kept between the business in question and their finance provider. Clients and customers will pay the invoiced money into an account as normal, but they are not made aware that a finance provider is involved. This is for businesses that are operating successfully, but can not realise the cash they’re owed quickly enough.

Benefits of confidential invoice discounting:

• Maintaining customer relationships
• Keep control of your own credit
• Provides certainty of funding
• Boost cash flow
• Doesn’t rely on owning assets

A cash flow solution for exporters, export finance helps to facilitate the commerce of goods internationally. When a seller agrees on the payment terms of the cross-border buyer, it can create cash flow issues. However, the supplier is still expected to ship the goods overseas knowing they will be paid at a later date. Export finance enables businesses to gain access to their working capital before their clients pay for the products purchased.

Types of export finance:

Pre-shipment finance: Provided when exporters need funds before the shipments of products or goods.

Post shipment finance: Provided after the shipment of products.

Finance against collection of bills: In the case of international export, exporters can obtain a loan from the bank against those bills sent for collection.

Finance, gains, allowances and subsidies: Government provides subsidies to the exporters to enable them to sell the goods at a reduced price to importers.

Discounting letter of credit: Consists of security from the issuing bank regarding making payment.

Benefits of export finance:

• Bridge the cash flow gap between paying suppliers and getting paid
• Minimised risk
• Release value of outstanding invoices
• Funding to grow international trading and pursue bigger opportunities

Read more about export finance here.

Flexible finance is a finance solution offered by alternative finance providers. Rather than offering one-size-fits-all solutions, alternative providers can tailor their offers to your company’s needs, without rigid terms that do not suit your business. Finance, rate and repayment options can be adapted to create the perfect finance solution.

Flexible finance providers can also offer finance for specific needs, such as to fund a large order, or to provide a cash advance on unpaid invoices. Even when you’ve entered a flexible business finance contract, there is still room for further flexibility. More finance can be accessed, or you can even request changes to your agreement.

Benefits of flexible finance

• Finance your business needs
• Set the loan period yourself
• Finance plan can be altered
• No restrictive contracts
• Business finance on your terms

Allowing businesses to gain instant access to cash tied up in unpaid invoices, invoice discounting can help a company to tap into the value of their sales ledger. When a customer or client is invoiced, you can sell these to a lender who will pay a percentage of the total value, providing your business with a cash flow boost.

Sometimes called confidential invoice discounting, invoice discounting is normally not disclosed, and you can continue to deal with your customers as normal. They won’t know you’re using a finance provider. However, this does mean you’ll have to chase invoices yourself, unlike invoice factoring.

Benefits of invoice discounting:

• Encourages growth within the business due to the flexible funding line
• Funding line increases at the same rate as your turnover, meaning terms don’t need to be renegotiated
• Release money tied up in unpaid invoices and boost your cash flow
• Negotiate better terms with suppliers with increased bargaining power

Invoice factoring is a finance facility intended to help business owners leverage their unpaid invoices enabling them to improve their cash flow position quickly. A factoring provider enables you to receive most of the invoice cash value immediately, rather than waiting for weeks or months to get paid.

The amount of finance available is typically stated as a percentage of your outstanding sales ledger, but can be restricted by certain terms, such as limiting exposure to a single large customer.

Usually, payments from customers will go into an account controlled by the factoring company, and your customers will be aware that you use invoice factoring. Some invoice factoring providers will present the option to credit insure specific customers, or your entire sales ledger, to minimise your exposure to bad credit.

Benefits of invoice factoring:

• Cash flow management made easier
• Most factoring providers will also manage credit control
• Save administration time as you won’t have to chase customers for invoice payments
• Business receives funds without waiting for customers to pay

Invoice trading is a means of borrowing money, wherein a business will obtain funds from investors using unpaid or overdue invoices. The invoices will act as a guarantee of payment. This finance option is facilitated by invoice trading platforms, which allow companies to sell invoices to online investors.

An invoice trading platform connects companies with cash flow issues with investors seeking short term investments. Because of this, invoice trading is often referred to as peer-to-peer lending, as well as invoice finance and invoice discounting.

Benefits of invoice trading

• Cash flow acceleration
• Easier alternative to traditional finance
• No collateral assets required
• Quick access to cash
• Available both to big and small businesses

A merchant cash advance is a form of business funding designed to help businesses gain flexible access to the cash they require. Lenders will provide the company with a cash advance, which it will pay back through a percentage of its customer’s card payments via card terminals.

Suitable for many businesses utilising card terminals, merchant cash advances can be easier to access than other forms of business finance. They are a valuable solution for companies with little or no assets, and those who need capital for growth but have a limited credit score.

Benefits of merchant cash advances

• Easy repayments
• Straightforward application process
• Frees up other forms of finance
• Flexible and scalable finance

Working capital, also referred to as net working capital, is the difference between a company’s current assets (such as accounts receivable, cash, and inventories of raw materials and finished goods) and its current liabilities (such as accounts payable and debts).

Net working capital is a measure of a company’s liquidity, short term financial health and operational efficiency. If a company has substantial positive net working capital, it should have the potential to invest and grow. However, if a company’s current assets don’t exceed its liabilities then it will have trouble paying back creditors and growing further.

Why is net working capital important?

Net working capital is necessary for businesses to remain solvent. In theory, a business could become bankrupt even if it is profitable. After all, a business cannot rely on paper profits to pay bills; bills need to be paid in cash readily in hand.

How to calculate net working capital

It should be calculated on a consistent basis, so that the results generated can be tracked on a trend line. To calculate your net working capital, follow this formula:

Marketable investments + Cash and cash equivalents + Trade accounts receivable + Inventory – Trade accounts payable = Net working capital

Purchase order financing, also referred to as PO financing, is an alternative way to access working capital, giving corporates borrowing alternatives. SMEs can access funds to pay suppliers before invoicing their buyers, eliminating the cash flow problems that represent many significant issues for small business owners.

Sharing a lot of similarities with short term loans, purchase order financing is used to pay for the production of goods only. This financing solution makes sure the buyers’ orders are fulfilled, and also keeps their record clean of other business loans. PO financing is a way to solve cash flow issues, allowing small businesses to fulfil otherwise impossible orders.

Benefits of purchase order financing

• Enables your company to grow without increased bank debt or diluting ownership
• Drives market share
• Provides the ability to buy inventory and grow sales when capital is limited
• Increases sales opportunities
• Facilitates cash flow for timely deliveries to customers
• Assists in recovery from a prior downturn

Also known as payroll finance, recruitment finance incorporates funding with an additional administrative and support solution, including payroll management, invoicing and collection services for recruitment agencies.
Recruitment finance enables you to release funds against outstanding invoices, which can be used to pay workers on time without waiting for your clients to pay. It is a quick and easy way to help manage your cash flow, and removes the worry associated with late payments.

The back-office support solutions can free up your time, leaving you to focus on finding new clients and growing your business.

Benefits of recruitment finance

• Calculating wages and salaries
• Timesheet management
• Making payroll
• Preparing and delivering individual payslips
• Raising and sending invoices out to your clients
• Professional credit control
• Negotiate better terms with suppliers
• Improve cash flow

A revolving line of credit is a type of working capital finance that enables you to withdraw money as and when you require it, and repay whenever is easiest for you. It’s a popular finance solution amongst businesses that need to boost their working capital, and it can be used as short term financing that you plan to pay off quickly.

Like a flexible, open-ended loan, a revolving line of credit enables you to borrow money, pay it back, borrow more and so on for the agreed duration of the term. Once you’ve repaid whatever you’ve used, you can withdraw more, hence the term ‘revolving’. Your lender will inform you what your credit limit is, and you can have the freedom to decide how much to borrow and repay each month.

Benefits of revolving lines of credit

• Shorter term borrowing than business loans
• Don’t need a new agreement every time you make a withdrawal
• Won’t pay anything until you actually start using the facility
• Quick to arrange and can draw down immediately
• Can work out cheaper in real terms than a fixed loan because you aren’t given a lump sump that immediately gathers interest

Spot factoring is a way for a business to access funds by selling unpaid invoices to a third party, usually a specialist spot factoring company, on a one-off basis to receive cash quicker. The spot factoring company will agree fees and rates with the business, and then select which invoices it would like to assign to them. Once the invoice is verified, the spot factoring company will advance a proportion of its value to the business.

Following this, the spot factoring company will then chase up the invoice from the client, and once the invoice is paid in full, the business is provided with the outstanding balance minus any pre-agreed fees.

Spot factoring allows access to quick cash with no addition to debt and no contracts or ongoing fees. If a business is seasonal with sudden increases in sales and a requirement for increased production costs, spot factoring could be more suitable to its immediate needs than traditional business finance.

Benefits of spot factoring

Support other facilities
Contract flexibility
Quickly release funding
Cost effective

Trade finance is an umbrella term, encompassing many financial products utilised by banks and companies to make trade transactions feasible. It represents the financial instruments and products used by these companies to help facilitate trade and commerce.

Trade finance makes it possible and easier for importers and exporters to transact business through trade. These services bridge the financial gap between the importers and exporters, adding a third party to the mix and in doing so reducing risk.

The different parties involved in trade finance include banks, trade finance companies, importers and exporters, insurers and export credit agencies.

Examples of trade finance products and services

• A letter of credit
• Forfaiting
• Lending
• A bank guarantee
• Export credit

Benefits of trade finance

• Improves cash flow and efficiency of operations
• Increases revenue and earnings
• Reduces risk associated with global trade by reconciling the needs of exporters and importers
• Reduces the risk of financial hardship

A working capital loan is taken to finance a company’s everyday operations. These loans are not used to buy any long-term assets or to make investments; they are instead used to provide the capital to cover day-to-day needs.

These needs could include costs like payroll, rent and debt payments. Because of this, working capital loans are, in essence, corporate debt borrowings. They are also often used by cyclical businesses during off-seasons, the debt of which is paid down during the busy season. Working capital loans are a flexible option for small businesses in need of quick cash to cover immediate expenses.

Pros and cons of working capital loans

The immediate benefit of working capital loans is that they are easy to obtain. They allow business owners to efficiently cover any gaps in expenditure. The other noticeable benefit is that it is a form of debt financing and doesn’t require an equity transaction, meaning that a business owner maintains full control of their company even if the financing need is dire.

Some working capital loans are unsecured, meaning they will only be available to business owners with a high credit rating. Other working capital loans are collateralised, leading to high interest rates to compensate the lending institution for risk. Furthermore, they are often tied to a business owner’s personal credit and any missed payments or defaults may hurt their credit score.