Getting To Know More About Invoice Factoring Auckland
If your business is experiencing cash flow problems, invoice factoring Auckland is a great way to help you overcome short term cash flow issues and help to boost your cash flow into the future. This article discusses invoice discounting in Auckland. The information also provides an overview of the key factors involved in factoring loans, as well as tips on how to improve your business's cash flow.
There are two main types of invoice discounting, namely equity finance and recourse finance. To understand these terms, you need to understand the differences between a business's accounts receivable and accounts payable. When you have invoices outstanding, you will clearly not be collecting any funds, and that means you do not have a balance on your accounts payable side of your balance sheet. As a result, you will be unable to obtain credit from either a lender or a financial institution and must rely on invoices factoring.
Invoice factoring Auckland works in a very similar way to invoice credit, where you use invoices to secure a line of credit. Essentially, when you are factoring your invoices, you are borrowing funds and using them to pay off existing invoices. For most businesses, this is the most financially feasible way of sustaining their cash flow, particularly in a tight environment. To be entitled to invoices factoring, you must have strong evidence that your business's invoices are carrying a positive cash flow - this is normally based on positive gross and net profit figures.
While it is true that businesses can take advantage of invoice discounting to reduce their costs, the risks involved can be excessive under certain circumstances. The riskiest scenario for invoice discounting is where your invoice discounting provider acts as your bank - they take care of your receivables whilst you continue to pay them through your business. This means that if you default on your repayments, they may continue to claim interest and penalties on your outstanding balances, so ultimately increasing your debt. For businesses already facing financial problems, these sorts of issues can quickly lead to loss of business. In addition, if your invoice factoring Auckland provider does not meet its contractual agreement, you may have to suffer the consequences of a bad relationship with this financial partner.
As you can see from the above example, the risks involved in invoice discounting are great. What is the solution? There are two options open to you when deciding whether invoice factoring in Auckland is the right solution for your business. Firstly, you can agree to accept invoices factoring on a temporary basis only, such as while you are undergoing a transition in your business's operations. However, it is important to note that the longer you choose to accept invoice financing on a temporary basis, the greater the chance that you will be unable to repay these debts.
Alternatively, you can consider an invoice financing loan. An invoice financing loan by Invoice Factors can be used to pay off your invoices while your balance remains manageable at a lower level. The downside to this option is that in the long term you may find that you need more than the amount of the monthly repayment you currently receive to pay back your loan. Invoice financing loans are also a poor choice for businesses that generate a large volume of invoices.
If you choose to use invoice factoring Auckland as a short-term solution to a longer term issue, you should look at entering into a commercial invoice financing agreement. These agreements normally charge a slightly higher rate of interest (although this is likely to be offset by the cost of capitalisation). The benefits of entering into a commercial invoice financing agreement are that it gives your business instant access to funds and the longer you take out the loan the lower the risk to your business. In addition, the repayments will be spread over a set period of time (typically 2 years) meaning that you will not face any significant additional expense in the immediate term. In contrast, invoice financing usually has a much longer payback period (often 5 years) which means that you have a much lower annual cost to manage and ultimately, there are significant long term benefits to entering into a commercial invoice discounting agreement.