Trade Credit: How It Works for Buyers and Suppliers

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Having the cash on hand at any given time to finance major business operations is tricky. We’re particularly talking about inventory, raw materials, or supplies to drive operations. That’s why trade credit exists: To help you gather the cash needed to pay off those bills over time.

Because, yes, although you’d love to have thousands — or maybe hundreds of thousands — of dollars immediately available to pay your vendors as soon as you purchase goods, it’s unlikely that you do. Or, at least, that you can constantly do it that way. Again, this is why trade credit exists. Here’s how it works and how it affects both buyers and suppliers.

Know how much cash you have on hand.

Trade credit: Defined and explained

If you’ve ever heard someone use the phrase “net terms,” then you’ve heard of trade credit even if you didn’t know it by its other name.  (Luckily, a rose by any other name smells as sweet, right?)

In simplest terms, trade credit is a short-term financing agreement between a buyer and a supplier. The supplier extends credit to the buyer, allowing them a designated period of time after delivery of the product or service to pay the fee. Those “net terms” you’ve heard of are the period during which the vendor has agreed to extend credit. So, net 30 means 30 business days, net 60 means 60 business days, and so on.

Trade credit is also the easiest type of short-term financing to get as it doesn’t involve a formal application process. And, since 25% of small-to-medium business owners (SMEs) are denied financing from lenders due to poor earnings and cash flow, it’s an essential part of the trade ecosystem.

How accounts receivable affects cash flow

What is trade credit used for?

Trade credit is used to facilitate the purchase of large goods and service contracts. (Even smaller purchases, too, depending on the relationships in place with suppliers.) With trade credit, businesses can purchase what they need at once and stagger repayment across vendors.

Also, implemented intelligently on the part of the buyer, trade credit also gives businesses the flexibility to make sure that they will have enough money to cover all of their trade credit bills on time.

What kind of businesses use trade credit?

Lots, actually. Trade credit is a business-to-business (B2B) service. But it’s very well utilized across industries. Restaurant owners buy from their ingredient suppliers on net terms. Lawn care companies bill their homeowners using trade credit. Strategy consultants extend a line of trade credit to their clients.

With that in mind, though, a buyer doesn’t automatically get trade credit just because they want it. You’ll want to think about trade credit as a tool for building relationships between businesses — and, subsequently, building business credit with continued payment on time and in full. A supplier won’t extend a business a trade credit line unless they have solid trust that they’ll be recouping all of their money at the end of the time frame.

Invoice Payment Terms — 7 Key Concepts and Tips 

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Advantages of trade credit

For buyers:

  • More time to pay. It’s hard to come up with the money you need to pay for major purchases all at once. Trade credit extends your window of payment from COD (cash or collect on delivery) to the terms you and your supplier agree on.
  • Build business credit. Trade lines of credit help you establish business credit. Some major credit bureaus take trade credit into account when calculating business credit scores.
  • Potential discounts. Many suppliers will offer small discounts to incentivize buyers to pay before their due date. You might be able to save money if you can pay before your bill comes due.

For suppliers:

  • Open up more relationships. The vast majority of buyers rely on trade credit for large purchases. Offering this financing for buyers can open up new relationships and potentially larger purchases with existing ones.
  • Becoming a preferred supplier. Customers may favor you if they’re able to negotiate favorable trade credit terms with you that aren’t available through competitors.

How to make the most of every invoice you send.

Drawbacks of trade credit

For buyers:

  • Potential discount loss. This is more opportunity cost than anything. Still, if you wait to pay your invoice until its due date, you forego any potential discount the supplier might offer if you pay upfront in cash.
  • Relationship risk. If you aren’t able to pay on your bill for services rendered or goods received, you risk putting your relationship with your vendor in jeopardy.

For suppliers:

  • Risk of delinquency. When you extend trade credit, there’s no guarantee that you’ll get your payment on time — or at all. And although you’ll only extend trade credit to the customers you trust, you’re still taking a gamble on their business.
  • Discounting. In order to incentivize your customers to pay before their terms come due, you might have to offer some form of discounting for early payment. This will cut into your margins.
  • Uneven cash flow. The nature of trade credit means you don’t know when your customers will pay. This creates an inherently uneven, unpredictable cash flow. While you want to be flexible, you also want to set terms that favor your business as well.

Establishing trade credit with suppliers

As we mentioned briefly, you can’t just have trade credit simply because you want it. There’s a deep trust involved in establishing payment terms with a vendor. If they extend you financing, they need to feel secure that you’re going to come through with their cash if they front you what you’re buying.

How to establish a trade credit relationship

The good news is, unlike traditional short-term financing, you don’t have to apply for trade credit. The less-good news is that you’ll generally have to begin at square one with a new supplier. That means starting with COD — or even up-front payment, depending on how your vendor works. Then, you might graduate to deposit, installment, or other net terms. But that’ll depend on how quickly and how well you can provide to your supplier that you’re dependable and creditworthy.

Much like a business lender, the business on the other end of the trade credit line wants to mitigate their risk as much as possible. So, although they’re not formally underwriting you, they’ll be judicious about whether or not to extend you advance payment terms.

If a potential partner doesn’t know much about you, they might opt to pay to check your business credit score to see your history with business debt. (This is a service that many of the major credit bureaus provide.) This is just one reason why it’s important to establish trade credit relationships when you can and keep up on top of them once you have them. Proof of past positive relationships can go a long way in building future relationships.

That first one can be tough to get and take time — but it’s crucial to open doors down the line!

The 5 C’s of Business Credit Explained 

What happens if you don’t honor your trade credit agreement

Your suppliers offered you trade credit because they trusted you, right? Don’t lose that trust! But you will if you can’t come through on your payment.

Not only will you very likely lose your opportunity to work on delayed payment terms with your vendors, but some may never choose to work with you again. They also might influence others not to extend you trade financing — especially if you work in a tight-knit industry.

Worst case scenario: It’s possible that if you owe a large payment, your supplier could hire a lawyer and send a collections agent after you.

Remember that even if you plan to pay, albeit late, suppliers are depending on your money. They factor your on-time payment into their cash flow. Coming up short could affect how — and if — another business is able to pay other suppliers, lenders, or finance their own operating costs. That’s a cascading effect! If you have a down month and need more time to pay, let your supplier know as soon as possible.

Offering trade credit to customers

On the other side as a supplier, you’re taking a risk if you decide to offer financing. And it’s important to understand the risk: SMEs spend nearly 15 days a year chasing payment on outstanding invoices.

But, if you size your risk correctly, you could be opening up your customer base.

Understanding accounts receivable turnover.

Determining whether or not to extend trade credit

The first question to ask yourself: Do you have an existing relationship with this customer? Do you have a way to know if they have a good history with payment? If the answer is yes, you might begin by asking for a deposit or a portion of the invoice COD  and extend net terms for the remainder of the invoice. Then, with time and proven responsibility, you can move toward a full trade credit relationship.

If you don’t have any way to gauge a company’s history, you can also either check their business credit score to get of sense of how they’ve handled past debt. Alternately, you can ask for a trade credit reference from other vendors with whom they’ve worked.

Offering an early payment incentive

To incentivize faster and guaranteed payment, many suppliers choose to offer a cash discount. A common discount is 2/10, or 2% off the price of the invoice if paid in 10 days.

Yes, that technically cuts into your margins on your product or service. But having the cash in hand to be able to put back into operating costs or invest, and knowing you won’t be out that money later, is worth it for many businesses.

What to do if your customers don’t honor your trade credit agreement

This is the chance you take, of course. Before anything, you’ll want to send out a late payment reminder. Don’t assume the worst!

In the interim, you might want to look into a solution like invoice factoring. It’s meant for a situation just like this! With invoice factoring, you sell your unpaid invoice to a factor (lender) who’ll pay you a significant portion of the balance. Then, they’ll pursue the outstanding payment from your client, and pay you the remainder, minus their fee, once they collect. This helps a lot with cash flow!

How trade credit affects cash flow

You’ve likely figured out by now that there’s a very direct tie into trade credit and cash flow. That goes regardless of which side of the terms you’re on.

As a customer…

  • You’ll be able to plan your invoice payment based on your cash flow projections.
  • You don’t have to pay COD or pay for everything at once if you don’t have the cash on hand for it.
  • You can stagger payments across multiple trade credit lines based on available cash flow.
  • You can take advantage of discounts if you have the available liquidity and know that paying in full early won’t affect your working capital.

As a supplier…

  • You might introduce an element of unpredictability into your accruals depending on when your customers actually pay.
  • You introduce the possibility of late or non-payment after services are rendered or goods are delivered.
  • You might want to take advantage of invoice factoring to access cash tied up in trade credit. 

With this in mind, the most important thing you can do on both sides of the equation is have the best handle on your cash flow possible. The more you know about the cash you have on hand, the more you’ll understand whether or not you’re able to either extend trade credit or pay off your invoices. That means you need to be able to forecast and project your cash flow accurately — the more data, the better.

PayPie’s cash flow forecasting tool does just that, nearly down to the minute, by integrating with your accounting software to create an interactive and informative dashboard.

cash flow management main dashboard

Signing up for PayPie is easy. Just create your free account, connect your business and run your cash flow forecast.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon. 

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels. 

How to Make the Most Out of Every Invoice You Send

Making the most of invoices

Invoices are something you issue to your customers after conducting business. An invoice is a clear indication of the services you have rendered or a product you’ve supplied along with all the associated costs. Invoices are part of doing business and they keep both parties accountable for their commitments.

Having a steady stream of money (also known as cash flow) means your business can continue to fund its operations. If your invoices aren’t serving you well, the resulting cash flow gaps can literally spell doom and gloom. By implementing the right invoicing processes, you not only mitigate any cash flow concerns — but you can also secure greater customer loyalty.

Invoice necessities

Let’s look at what makes up the meat of the invoice — the basic necessities that your customer needs to know who sent the invoice and why. This includes:

  • The name of your business and your logo.
  • Your contact information — business name, address and contact information.
  • The recipient’s name, address and contact information.
  • The product(s) or service(s) for which the invoice was issued, along with prices.
  • Payment terms and conditions, payment deadlines and invoice creation date.

Now that the necessities have been covered, we’re not stopping there — that was the vanilla invoice. We’re here to elevate your invoicing and have every invoice you send generate a whole lot of additional benefit with minimal effort.

Read more about accounts receivable turnover.

invoice as a marketing tool infographic

3 Ways to tap into the marketing potential of your invoices

Many businesses, regardless of their size, underestimate the power that invoices possess. They’re often seen merely as receipts — yet they have powerful marketing potential that often goes unnoticed. Let’s face it, the people you do business with will encounter invoices that are produced and delivered by you. Leverage these nifty little sheets to secure consumer fidelity and even help attract new faces.

Take some time to revisit your invoices — assess the layout, format, and overall look of invoices being sent out to your customers.

1. Add incentives  

Don’t be basic with your invoice creation process and don’t be afraid to drop a few irresistible incentives on the sheet. What do I mean by incentives? Well, what would encourage you to do business again? Discount codes sound pretty enticing to me. What about referral codes to share with friends? Heck yes! Include them too, now your client has a reason to mention you to their friends and family — aside from your splendid quality and customer service of course. Having discount codes and referral options accompany an invoice is a surefire way to get customers coming back to you with friends in tow.

2. Promote new products

Now let’s assume you’re developing a new product. Guess what? You can promote it through your invoice too. The beautiful thing about an invoice is that people value them and inspect them carefully. All eyes are glued to this document, so why not take advantage of all the attention it manages to garner? Include a message or a notification within your invoice informing people of a new product launch or a sneak-peek into future product development. Get your customer excited about the future and any new offering you will have in store for them. This too can go hand-in-hand with the aforementioned promotional codes that may be included in the invoice.

3. Encourage feedback

Use your invoice as a means to encourage customers to give you feedback. This is a great way to further improve your business model and product for any future purchases, thus elevating the perception of your brand and developing social proof.

Keep in mind that customers are the reason for your existence, if it weren’t for them, you wouldn’t be here. Continue to improve the customer experience through a scrupulous feedback gathering process, which can be enhanced through the use of invoices. Include a contact number, or a website URL in your invoice that customers can use to share their feedback.

Invoicing and cash flow

Being able to effectively forecast your future financial situation is critical for any business. This information guides marketing or product development budgets, how you will proceed with expansion and let’s not forget your investors who may be looking to assess your future prospects.

By staying vigilant and organized throughout your invoicing process, you’ll have better information from which to build your cash flow forecasts. For instance, if you’ve set the right terms and your collections are working effectively, you’ll have a better turnover ratio. On the other hand, if your terms aren’t beneficial to your business, cash flow forecasting will help you pinpoint the issues.

Also, keep in mind who your business owes. You probably have obligations to reimburse vendors and various suppliers under strict deadlines, don’t overlook this important detail. Revert back to your accounts receivable and take note to see if your future expected cash flow meets or exceeds your own debts.

Use outstanding invoices to quickly access cash 

Lastly, I want to share something that some businesses — especially new ones —may not be aware of. What I am talking about here is invoice factoring. There may come a time when your business will need to access a sizeable sum of cash quickly, without actually having the necessary funds in hand. In these instances, your outstanding invoices can be converted into cash quickly through a process known as invoice factoring.

You don’t have to wait for your clients to muster up their debt before a deadline that could be a month or more down the road. You can sell off a portion of your accounts receivable to a third party (known as a factor) at a discounted rate. Accounts receivable factoring is typically used as a short-term financing and may be used in conjunction with other financing tools like loans, credit cards or a line of credit.

Stay vigilant of all your outstanding invoices. Some clients can be rather unruly and may not follow through with their financial obligation stifling your cash flow. A reliable factor can alleviate some of the financial woes and give you more breathing room while allowing your business to keep moving forward. (Plus, the factor often takes care of the collection process.)

Read more about invoice payment terms.

Wrapping it up

Often times invoices are seen as the most basic form for depicting a business transaction and nothing more. The good news is that invoices can become so much more and help garner attention and respect your business actually deserves.

Your marketing efforts along with business’ fiscal health can be elevated by carefully structuring your invoices and their delivery method. Now that you’re endowed with this knowledge, maybe the next time you create and send an invoice, you’ll fully realize the potential this document holds.

This guest post was provided by InvoiceBerry, smart invoicing for small businesses and freelancers.

To create cash flow forecasts that help you see patterns in your accounts receivable processes, create a free PayPie account and connect your accounting software.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pixels and InvoiceBerry. 

Accounts Receivable Turnover: Why It Matters

Accounts Receivable Turnover Paid Invoices

As a business owner, you probably have numbers running through your head all the time as it is. But, it’s important to add another calculation to your list — accounts receivable turnover — to help complete your cash flow picture.

At PayPie, we know how difficult it can be to stay on top of every sum, ratio and forecast of your accounts, no matter how diligent of a business owner you are. That’s why we try and make it simpler with insightful tools that delve deeper into your finances, rather than showing you your account balance and nothing else.

Together, we can add this calculation to the list.

What’s accounts receivable turnover?

When you invoice a customer and set the terms of payment, you’re essentially creating a form of credit.

Customer credit is a vital payment method for any business — it lets your customers buy goods or services from you now and fully pay for them later. Therefore, it can drive sales, but it can also be a detriment to your cash flow if some of your customers fail to pay in full, even with time to do so.

Accounts receivable turnover analyzes just how well you’re dealing with outstanding customer credit. The simple ratio, also known as the accounts receivable turnover ratio or debtor’s turnover ratio, gives you an insight into how customer credit affects your business.

Mainly, it points out how well you’re managing your customer credit relationships and collecting the proper payments on any outstanding debts your customers are carrying.

Read More: 7 Ways to Boost Cash Flow

How accounts receivable turnover is calculated

Jot down this ratio — or bookmark this page — so you remember it from now on:

Accounts receivable turnover = net credit sales ÷ average accounts receivable during the tracking period

Be sure you’re only incorporating your credit sales since cash payments have nothing to do with the effectiveness of your crediting scheme.

This ratio is often calculated on an annual basis. However, it can also be measured on a quarterly or monthly basis.

accounts receivable turnover ratio calculation

An example of how to calculate accounts receivable turnover

The following is an example of how to calculate accounts receivable turnover on an annual basis.

Let’s say Widgets Incorporated had $1,000,000 in accounts receivables as of January 1, the start of their fiscal year. On December 31, at the end of the year, they had $2,000,000 in accounts receivables.

Throughout the year, they had a total of $5,000,000 in net credit sales.

Step 1: To get the average accounts receivable, you follow the same formula that you would for any average. You add both numbers together and divide by two.

Average accounts receivable = ($1,000,000 + $2,000,000) ÷ 2 = $1,500,000

Step 2: Take the net credit sales and divide it by the average accounts receivable.

$5,000,000 ÷ $1,500,000 = 3.33

Step 3: Divide 365 (number of days in a year) by the accounts receivable turnover to see how long it takes an average customer to pay their bill.

365 ÷ 3.33 = 109.6

This means that the average Widgets Incorporated customer takes nearly 110 days to pay their bill. Clearly, this needs to be fixed. The company makes great widgets, but they’re a bit too generous with their payment periods and need to ramp up on collections.

Accounts Receivable Turnover Ratio

How accounts receivable turnover is used

You can’t predict future sales or cash flow with 100% accuracy, but the accounts receivable turnover ratio gives you deeper insight into your business prospects. The ratio shows you how long it takes customers to pay their debts, which can help you plan your future expenses.

By pinpointing any collections problems your company faces, you can boost cash flow back into the business. This will help you foster future growth for your company and focus your efforts to cultivate a client base that’s financially robust and responsible.

Read More: Cash Flow Basics — Key Concepts and Terms 

Why accounts receivable turnover matters

Your ratio can reveal whether or not your company has a good credit policy. It also shows how well you’re managing any outstanding debts. A low accounts receivable turnover ratio might deter lenders from working with you. Without available cash flow at the right points in time, how will you repay your debts?

If you’re unhappy with the ratio you find, you can implement new policies to boost your figures. For example, a low ratio might require you to impart more stringent penalties on late payments. Or, you could come up with a rewards program for those clients who always — or begin to — pay on time.

Read More: Cash Flow Problems: 6 Top Causes

Evaluating your accounts receivable turnover

What’s a good turnover ratio and what represents opportunities for improvement? When it comes to the account receivable turnover ratio, the higher the number, the better. A sizeable figure can highlight plenty of good qualities about your business, including:

  • You’re regularly receiving debt payments, thus boosting cash flow.
  • Customers pay you back fast, which means they don’t have an outstanding line of credit and can buy more from you.
  • You have a good customer base that adheres to invoice due dates rather than taking on debts
  • Your collection system works well.

On the other hand, you might calculate your account receivable turnover to find a very small number after the equal sign. If so, your low ratio could indicate that:

  • Your cash flow is low since your customers have lingering debts.
  • Customers can’t make payments, which means they likely won’t buy again in the future.
  • You have an overly lenient credit scheme.
  • Your collection system is ineffective.

Fortunately, once you see where you fall on this spectrum, you can start making some of the improvements mentioned above to your crediting scheme. Or, you can keep moving forward if you’ve already got a system that’s proven to work.

If you experience a cash flow shortage while you’re working on improving your accounts receivables processes, invoice factoring is one way to turn an unpaid invoice into cash. Basically, it lets you sell the invoice to a buyer/lender so that you can get a set percentage cash out of the invoice as quickly as possible. (Learn more about invoice factoring here.) 

How accounts receivable turnover affects cash flow

It’s clear how a positive accounts receivable turnover would boost cash flow. If customers are diligent about repaying their debts — and if you incentivize their behavior or penalize lateness — you’ll have more cash pumping into your company.

On top of that, your regular customers will keep coming back, since they’re regularly repaying and re-opening their lines of credit. The more good payments you’re receiving, the better your cash flow will be.

Cash flow is vital to your business— when money comes in on a reliable and regular basis, you can expand your reach and seize opportunities in countless ways. And, while the accounts receivable turnover ratio is one way to figure out how you can boost the amount of cash on hand, you will also benefit from a cash flow forecast from PayPie.

This report takes a deep dive into your accounts receivables to show you just how healthy your business is right now and how much it’s set to grow in the future. It helps you visualize your strongest suits, as well as the areas in which you can improve.

If you’re a business owner, then there’s no better time than now to start forecasting and planning for the future.

Log in — and crunch some numbers of your own — to get on the right track.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Shutterstock and Pexels.

7 Ways to Boost Cash Flow

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A successful business is all about the bottom line — are you profitable or are you losing money?

For many businesses, this can be tough at the start. Imagine starting a business, for example. Leasing a space, filling it with furniture, buying equipment and hiring staff all costs a lot of money. And cash doesn’t always come in the second you open the doors.

It’s a frustrating reality when you know you’re on the way to bringing in revenue down the line but you have to sustain your business until that happens. In fact, even established businesses can have cash flow issues.

There’s an answer to your problem — boosting cash flow

Having more cash on hand by using targeted strategies to boost cash flow helps keep a company afloat until it starts turning over more significant profits and paying for itself.

To increase cash flow, you have to find the right balance between spending, cost-cutting and other factors that contribute to the bottom line. PayPie understands that can be difficult to do without a little help or the right tools.

Seven proven methods to boost cash flow

These tactics have successfully helped others bring in cash in the past and can help secure your business’s future.

1. Know your options

Some ways to boost cash flow are intuitive, or they’re otherwise easy to discern on your own. If you’re a newbie, though, you might be better off with a helping hand as you endeavor to increase the liquid assets you have on hand. You can rely on a short-term lender or use software to highlight the areas in which you can cut spending.

For example, you might be able to take advantage of invoice factoring. This short-term lending option will have a factor pay you a percentage of an invoice. Then, they make it their mission to gather any outstanding payments. They keep a percentage, then give the remainder to you. Their initial payment provides you with the cash you need as does their follow-up on the initial invoice.

A cash flow forecasting tool helps you see the patterns in how the money is flowing in and out of your business. It highlights the areas that are draining your business’s cash flow and pinpoints where the cash is coming in — telling you where you can focus your efforts to increase your bottom line even more.

Learn More: How to Read a Cash Flow Statement.

2. Sell unused equipment and inventory

The trick to understanding how to boost cash flow is to be extremely critical with every aspect of your business. For starters, take a look at your inventory. Anything you have left over that won’t be used in the next year should be sold as soon as possible — that is, unless you won’t incur any costs from keeping it that long.

Equipment should also be scrutinized. Outdated machinery or technology you no longer use can bring in a good chunk of change. Plus, getting rid of something that’s taking up space can free up square footage for a more updated piece of machinery. This can serve to boost your business’s productivity. Selling the old model can also bring in the cash you need to buy a newer version.

3. Take bigger deposits

Chances are good your company already requires a deposit for custom orders, large orders or with new customers. Without that guarantee, the client could back out, leaving you with highly customized items or a surplus of products that you’ll have a hard time selling to others.

With that in mind, evaluate how much you require as a down payment before you begin working. You can justifiably ask for half the cost of the total project before you start — if you do not require that much now, hike your commission rate. Not only will it increase your cash flow, but it’ll also ensure clients are serious about paying you when the project’s complete. They will want a return on their investment, after all.

4. Lease — for now

It might seem counterintuitive to lease since you know leasing means you’ll end up paying more for your space or your supplies in the long run. However, you shouldn’t buy things outright when cash is tight. Instead, see if you can lease your workspace or the equipment you need to make your business a reality. That’ll give you more cash to use for day-to-day expenses and, once you’re running productively, you can invest more cash to buy the items you need.

Learn More: Cash Flow Basics — Key Concepts and Terms.

5. Scrutinize payment terms

You have money coming in and going out — how much time is there between these two events? Another way to boost cash flow is to evaluate the terms you share with your suppliers as well as your customers. If you’re required to pay the former within 20 days, but your customers have 30 days to pay for your services, then you have a considerable amount of time in which you’re reliant on your own cash.

You might want to reconsider the terms of payment with either end of your production process. Reaching out to new suppliers might help you find a bigger window for repayment. You might also see an even cheaper option that makes it easier for you to float between spending and receiving cash from customers.

Of course, your pre-existing supplier might be willing to negotiate with you, too. As long as they know you’re going to be a client for a considerable amount of time. Just make sure you’re smart about these discussions — take your time to find the right balance between your needs and your supplier’s needs. To that end, your clients might have to start paying for your services sooner to make the time between payments a bit easier on you.

6. Incentivize and penalize

In a similar vein, you might want to find ways to encourage customers to pay you ahead of schedule. On the one hand, you can come up with an incentive for them to pay early. A small discount is unlikely to hurt your bottom line, but it could make a big difference to clients. Knowing they’ll get this percentage off their bill will probably be enough to inspire them to get their payments in on time, thus putting cash in your pocket ASAP.

You might also consider implementing a penalty for customers who are routinely late with their payments. Adding interest to a standing debt, for example, will spur them to pay you back with haste. When they do, you’ll at least receive a little extra for your trouble.

7. Re-evaluate your prices

Selecting the proper price for your products is a delicate balance. Larger companies have their own tricks for doing it, but you might’ve gone with a simpler strategy — a number just enough to turn a profit, for example.

Unfortunately, undervaluing your products reduces the cash you receive per purchase, and it also makes your creation seem less valuable than it is. Customers and clients won’t take you seriously. If your number is too high, you won’t be considered, either. Instead, you’ll be lost in the fray to competitors who have chosen a better price for their products.

Don’t be afraid to adjust prices to boost cash flow. For example, slightly increasing prices won’t push customers away, but it will give you more money and add perceived value to your products.

Read More: Cash Flow Problems: 6 Top Causes.

Keep it flowing

No matter how great your business idea is, you need cash to keep it going. Implement any one of these tactics to boost cash flow and guide your business through any cash shortages.

You can also enlist the help of PayPie’s free cash flow forecasting to personalize your path to a healthy cash flow. No matter which avenue you choose, you, your customers and your investors will be glad you did.

PayPie currently integrates with QuickBooks Online to access the cash flow forecasting and risk scoring tools. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

Invoice Factoring vs Invoice Financing

invoice factoring vs invoice financing application image

Invoice factoring vs invoice financing. What’s the difference and why do these lending options exist in the first place? But, first, does this story sound familiar?

At your business, orders are coming in at a consistent pace and you expect payment on a large invoice from one of your most reliable customers in a week or two. Your customer is a little bit late paying you, but you can trust them. The problem is, you have to pay your employees in a few days and you’re a little low on cash.

Thanks to technology and innovators, like PayPie, who’ve realized the inherent need for better short-term lending options for small businesses, your outstanding invoices are assets that can be used to get the funding you so desperately need.

24% of SMEs now turn to alternative small business financing, like invoice factoring and invoice financing

Read More: Why You Should Separate Business and Personal Finances. 

It’s hard for SMEs to find short-term business financing

According to the 2017 Small Business Credit Survey, some of the most common financial challenges many small businesses face are funding short-term operational costs, like wages, buying the materials needed to fill a large purchase order or just paying the bills.

The problem: Traditional brick-and-mortar banks aren’t really set up to handle this kind of short-term lending designed to solve a cash flow crunch. Bank are averse to risk and lower collateral levels, requiring more than the promise of a paid invoice. The approval process slower and less certain, which is also why less than half of all SMEs seek business financing from either large or small banks.

The solution: 24% of SMEs now turn to alternative small business financing, like invoice factoring and invoice financing, from online lenders who offer these options. For many of these businesses, these options are the answer to their cash flow crisis.

Invoice factoring vs invoice financing? They are both good options when you’re in a pinch and you need cash to meet your day-to-day responsibilities.

How SMEs are turning unpaid invoices into cash more quickly

Manufacturers, wholesalers, retailers, distributors and service-based businesses often have a lot of operational cash flow tied up in unpaid invoices (accounts receivables).

Either through payment terms, timing, lateness or other factors, the cycle of cash coming into the company gets out of sync with the timing of expenses, like payroll, rent, utilities and the cost of materials.

Both invoice factoring and invoice financing were developed as solutions these kinds of short-term cash flow problems.

Many SMEs need better short-term options to fund wages, purchase materials or just pay the bills

Invoice factoring vs invoice financing: What they are  

Invoice factoring and financing are two forms of asset-based lending. In both cases, the assets you’re leveraging are your unpaid invoices. The main difference is who collects the final payment from the customer.

With invoice factoring (accounts receivable factoring), the lender (factor) purchases your invoice by paying you a percentage of the outstanding amount (invoice discounting). The factor then handles the process of collecting the invoice payment. Once the customer pays the factor, the remaining amount is factored back to you — minus any fees and a set percentage for the transaction.

With invoice financing, your invoice is the collateral and the lender pays you a percentage of the invoice. In this case, you handle getting payment from your customer. Once your customer pays you, you pay the lender back — with fees and interest included. Depending on your arrangement with the lender, you may receive a final cash sum once you pass along your repayment.

The factoring industry, including both invoice factoring and invoice financing, is a $3 trillion business

Read More: Cash Flow 101. 

How the fees and percentages are determined for invoice factoring and invoice financing

When you research choosing invoice factoring vs invoice financing, you’ll see a range of percentages and rates for processing fees.

The lender sets the processing fee. The percentage you’ll receive from your invoice is a function of the size of the invoice and how the lender views your business and your customer’s business in terms of risk.

The better your business’ financial health and risk profile, the higher percentage you’ll receive when either factoring or financing your invoices.

Invoice factoring vs invoice financing: How the difference affects your business

Because the factor takes over the burden of collecting payment, invoice factoring can really help small businesses that simply don’t have the time to chase down outstanding invoices.

The counterpoint is that your customers may find out that you’re using a factoring service when they’re contacted for collections.

If you prefer to keep control over your collections processes, you may opt for invoice financing over invoice factoring.

Invoice factoring vs invoice financing: How do you choose?

The choice always comes back to what’s right for your business. It’s possible that your customers may not be bothered by invoice factoring if you take the time to communicate with them in advance of factoring the invoice.

But, maybe you just prefer to be the one to control the collections. Or, maybe the lender you prefer only offers one or the other. In the end, it’s all about your personal comfort level.

The benefits of invoice factoring and financing

The approval process for both invoice factoring and invoice financing is faster and friendlier. This is especially helpful for new businesses with only a few years of financial history, businesses who need cash quickly and those who don’t want to gather every form of documentation since the stone age.

Unlike traditional loans that have multiple payments structured in regular intervals spread over several months or years, with invoice factoring and invoice financing you only pay the fees once per invoice. There are also only two payments: You get the bulk of your cash when the invoice is factored or financed and the remaining balance when the invoice is paid.

Learn More: How to Read a Cash Flow Statement.

How long have invoice factoring and invoice financing been around?

As long as there have been businesses supplying services, goods and materials, there have been businesses waiting to be paid.

In fact, asset-based financing dates back to early Mesopotamia during King Hammurabi’s time. This kind of short-term business lending helped fuel the textile industry during the industrial revolution. Asset-based lending continued to gain traction in modern economies as traditional lending models tightened.

Today, the factoring industry, including both invoice factoring and invoice financing, is a $3 trillion business.

What’s next for asset-based lending?

That’s where PayPie comes in. We will transform the way businesses and lenders connect by using blockchain technology to securely and easily trade information. A single ledger technology, blockchain is a way for businesses and lenders to share the same information in near real-time.

As we’re laying the groundwork for our business financing opportunities, we’re also providing sophisticated cash flow forecasting and risk assessment that gives each business a better idea of where they stand in terms of cash flow. (Click here to be notified when our financing solutions are available.)

Get your free cash flow forecast

Our insights and analysis are free. Your dynamic report will give you all the charts and graphs you need to understand the crucial elements affecting your cash flow. It will also contain a proprietary risk score showing how potential lenders might evaluate your business in comparison to others.

If you’re a QuickBooks Online user, all you have to do is sign up for PayPie then connect your account. (Future accounting platform integrations are coming soon.)


PayPie Cash Flow Forecast Example

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

 

Cash Flow Problems: 6 Top Causes

cash flow problems top causes

Many small businesses are only one late invoice away from a cash flow crisis. They face serious risks of losing everything they’ve worked so hard to build. One of the biggest reasons small businesses fail is due to cash flow problems.

Time and again, study after study shows that when a business fails, it’s due to poor cash flow. Twenty-two percent of small businesses say that cash flow is a challenge. That’s a pretty sobering thought.

Cash flow has the biggest impact out of almost anything else you can imagine. Fortunately, there are certain factors that lead to cash flow issues or a cash flow crisis. Knowing these factors lets you better protect your business.

This is the reason why PayPie wanted to provide you with six of the top causes of cash flow problems you’ll want to avoid.

Read More: Reporting, Cash Flow and Your Business’ Financial Health.

1. Lack of an Emergency Fund

No matter what type of business you run, there will be times when business booms. There will also be times when business stutters. When cash flows in, set some of the profit aside in an emergency fund.

You never know what life might throw your way, so having enough funds to cover a catastrophe is smart. If you’re one late invoice from failing — imagine the relief of having an emergency fund during to respond to unexpected cash flow problems.

Ideally, you should start your business with enough funds in place to cover emergencies, unexpected expenses and cash flow issues. However, if you’re already in business, you might not have planned for such a fund. In this case, throw every extra bit of money you can into your emergency fund until you have enough to cover any major issue.

2. Poor Invoicing Practices

Keep cash flowing into your business by invoicing on a schedule and following up on unpaid invoices. Most business people become so busy building their businesses they let paperwork fall behind, which can lead to cash flow problems.

If you don’t invoice your customers, they aren’t likely to pay you. Even if you have invoiced them, you may need to follow up. Remember they are busy, too.

You may also want to run a quick credit check on new clients. If they have poor credit, request at least a portion of the payment up front and as the work is completed. If you can’t keep up with invoicing, try investing in a virtual assistant to keep up on such matters for you. Online software also allows you to automate invoicing and reminders for unpaid invoices.

3. Unsynced Credit Terms

When setting up the credit terms for your customers, you also need to look at the credit terms from your suppliers. If your suppliers offer net-30 and you offer your customers net-60, you’ll likely encounter cash flow issues. Net-days can translate to nearly any number. Some suppliers only offer 15 days  (net-15), for example. Seek suppliers with the most generous net-days terms you can find.

Take the time to study your books and discover what terms each of your suppliers offer. Your terms to your customers should be less than the shortest payment time to your suppliers. This gives you some room in case your customer pays a bit late. The last thing you want is to owe your supplier well before your customer owes you.

A free cash flow forecast from PayPie will also give you insights into your accounts receivable cycle. Armed with this information, you can help anticipate and prevent a future cash flow crisis.

4. Growing Pains

Growing at a rapid pace is something every business owner dreams of. Then it happens, and you realize you don’t have the funds to supply that growth. Imagine a scenario where you’re mentioned by a social media influencer.

You suddenly have 100 new customers you didn’t have last month. Where does the money come from to buy the goods to supply those customers or pay the employees to provide a service?

When you gain an influx of new customers all at once, you then have to supply those customers. But, you haven’t been paid by them yet.

One way to avoid this is to change your terms before the growth hits. Ask for at least some payment up front before you send items to customers or begin work. Make sure it is enough to cover your expenses. When the customer pays the remainder of the invoice, you’ll get your profit. It’s easier to wait on profit than to hit negative numbers on the books.

Read More: Cash Flow Forecasting: What You Need to Know.

5. Not Monitoring Expenses

Over time, expenses creep in that you might not have budgeted for. Perhaps a supplier raises their prices, and you’re too busy to seek a new supplier. Perhaps your monthly rent goes up, and it’s too much work to move to a new location.

Whatever the cause of these creeping costs, if you don’t monitor them closely, the resulting cash flow problems can potentially overtake your business.

At least once per quarter, take the time to sit down and review your costs. Look at wages, supplier costs, rent and even things such as utilities. Where can you cut down on the costs or implement policies to reduce expenses?

6. Not Planning for Seasonal Fluctuations

Every business on the planet has slow seasons. For retail establishments, this is traditionally January and February. For other industries, it might be the winter months or the summer months or anything in between. Not planning for these fluctuations leaves you with unneeded inventory and lack of funding.

Don’t wait for the fluctuations to cause cash flow problems. Plan ahead. If you know that winter is slow for your business, then cut back on inventory the month or two before the slow season hits. Plan promotions ahead to up your income during these months, or use the time to travel to trade shows and drum up new business and clients.

Cash Flow Woes

Almost every business experiences cash flow problems at some point. Knowing the causes of cash flow issues allows you to avoid the inevitable pitfalls. With a little pre-planning and a lot of organization, your business will run like a well-oiled machine.

Instead of stunting your growth or killing your business entirely, overcoming a cash flow crisis gives a competitive edge by realizing the value of having plans in place.

Wondering just how much cash flow you need to keep your business healthy and thriving? PayPie offers cash flow forecasting.*

Get a free cash flow forecast today and get a handle on problem areas before they become a financial crisis.

We’d personally like to thank Sarah Landrum of Punched Clocks for contributing this post.

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.