As any business owner knows, cash flow is essential for keeping the lights on and the doors open. However, waiting for customers to pay their invoices can often lead to a frustrating and costly game of financial chicken.
One way to ease the strain on your cash flow is to consider using a sales ledger finance or invoice factoring service. With sales ledger finance, you essentially hand over your accounts receivable to a lender in exchange for an immediate infusion of cash.
The lender then collects the payments from your customers on your behalf, and you receive a percentage of the total amount due, minus fees. Invoice factoring works in much the same way, but with one key difference: instead of borrowing against your accounts receivable, you sell them outright to the lender.
This means that you give up some control over the collections process, but it also frees up more capital for immediate use. Ultimately, which option is best for your business will depend on your specific circumstances. However, both sales ledger finance and invoice factoring can be useful tools for managing your cash flow and keeping your business afloat during tough times.
Eventually, even a company that is doing well and growing will run into cash flow problems. It is actually customers who are slow to pay invoices that are the major cause of cash flow problems as the sales ledger expands, invoice factoring maybe a solution.
It is okay for companies to offer terms and wait until they get paid – at least in the beginning. You will eventually run out of cash if your company is growing rapidly. When this happens, problems arise.
This problem can be solved easily by getting financing. Midsized companies that are doing reasonably well, however, lack many options in the current marketplace. Despite being well managed and growing companies, these companies cannot receive a credit line just yet.
Companies like these are often pushed into products that are helpful, but better suited for start-ups and smaller companies.
The options are sales ledger financing and factoring
Commercial lines of credit are usually available to large businesses. They improve a company’s cash flow tremendously and offer tremendous flexibility. They are difficult to obtain, however. There are tough qualifications required by banks and lenders, both for companies and for borrowers (personally). Financial statements and assets are important factors that determine whether a company can secure a credit line.
Conversely, companies that have a short track record (or are in turnaround mode) are recommended to utilise invoice factoring. The factoring process allows companies to access funding against slow-paying invoices by leveraging the commercial credit of their customers. The process is simple and easy to set up.
Nevertheless, factoring companies implement a wide range of controls to ensure that all invoices are accurate. Some controls involve contacting the payers regularly to verify payment details. Clients and their customers may find these controls cumbersome.
A better option – sales ledger financing
An alternative to factoring, sales ledger financing is a great option for companies that have outgrown factoring but do not qualify for a line of credit. Despite having many of the advantages and flexibility of a line of credit, the solution does not come with the redundant controls that can be found in many factoring programs.
Therefore, sales ledger financing is an ideal option for midsize companies that have good financial controls and are doing well.
Sales ledger financing vs. invoice factoring
A number of advantages of sales ledger financing over accounts receivable factoring can be found, including flexibility, cost, and ease of use.
- Funding process:
Factoring transactions require some paperwork as part of the funding process. If you want to fund invoices, you must submit a legal document called a Schedule of Accounts, which specifies each invoice. You must also submit each invoice for which funding is required, as well as any supplemental documentation that verifies the service/product stated in the invoice.
It is a lot simpler to finance sales ledgers. Your accounting system or invoicing system can generate a copy of your sales ledger, which you need to submit.
- Funds advance percentage:
Accounts receivable that are used as collateral will only be funded in a percentage. Additionally, this is true of most facilities that utilize accounts receivable as collateral.
Factoring and ledger financing both advance the same percentage of funds. The average company can finance 80% to 85% of its sales ledger. Exceptions to this rule include transportation and staffing companies, which can frequently finance 90% of their ledger.
- Pricing structure and cost:
A sales ledger financing line has a lower cost than a comparable factoring line. They are also priced differently.
For example, a factoring line may charge x% for every 5 days or y% for every day. The cost of the factoring line is determined by the face value of the invoices.
An alternative to factoring is sale ledger financing pricing, a combination of factoring and lines of credit. A small fee is added to the funding cost based on the WSJ prime rate. In this approach, x% is added to the funds employed daily and is commonly known as prime + x%. Depending on the size of the sales ledger, there may also be a small maintenance fee.
- Invoice verifications:
Factoring companies verify a majority of invoices before funding them as part of their funding procedures. During invoice verifications, each invoice is checked for accuracy and consistency. Before funding, the invoices must be verified. If invoices take a long time to verify, funds will not be transferred.
A less aggressive but equally thorough approach is taken when it comes to sales ledger financing. Similar to a line of credit, it uses a verification process that doesn’t always involve regular contact with customers.
Factoring companies generally offer invoice factoring. Factoring companies also offer ledger financing, but many banks do as well.
Summary: Advantages of sales ledger financing
Sales ledger financing and invoice factoring solve the same problem: they enhance your cash flow by financing invoices that are paid on net 30-to-60-day terms. Generally, sales ledger financing has the following advantages over factoring:
- Better client experience:
One of the greatest advantages of sales ledger financing is that you and your customers can use it more easily than factoring. All you need is your sales ledger to get funded. A schedule of accounts, a copy of every invoice, and backup documentation for each invoice would be required if you were factoring.
In addition to providing a better experience for your customers, sales ledger financing also benefits you. Customers don’t need to go through conventional factoring verification procedures. Client relationships can be sensitive when using factoring.
- Better rates:
It is both feasible and competitive to factor and finance sales ledgers. In contrast, sales ledger financing offers slightly higher rates because it is aimed at companies that are no longer in need of factoring.
- Steppingstone to a line of credit:
Sales ledger financing can serve as a steppingstone to better, more affordable financing if used strategically. Some clients opt to upgrade borrowing base certificate programs, such as asset-based loans or lines of credit.
Who qualifies for sales ledger financing?
Companies that meet certain criteria are eligible for sales ledger financing. They must meet the following requirements:
- Have annual sales of one million pounds or more
- Be able to provide accurate financial statements
- Have good sales backup documentation
- Be profitable, or have a short-term plan to profitability
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Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.