IS INVOICE DISCOUNTING A VIABLE OPTION FOR MY BUSINESS?
- I’m having real cashflow problems in my business at the moment – we’re still outstanding payment on some invoices going back as far as August last year, while others we’ve had to right off as bad debts and accept that the account won’t be paid for one reason or another. We are a small business with 10 employees in total. My wife and I are responsible for the accounts but now I’m worried that I won’t be able to meet the wage bill in March if the situation doesn’t improve quickly. I’ve looked at ways of getting cash in to help tide us over but the only option I think is open to me is invoice discounting with my bank. Should I go ahead with it?
- First off, you’re not alone. Hundreds of businesses like yours are struggling with cashflow right now. Sales may look good on paper but if you’re not getting paid on time, it can really harm your business, as you are finding out right now.
Invoice discounting can work in a situation like this but you need to enter into it with your eyes wide open – it’s certainly not a long term solution to your problems and it could end up costing you more than you initially think. A lot of business owners think that getting 80% of the value of an invoice is akin to getting cash up front – it’s not. You’ll be charged at least 3% as long as you make the repayment in time. If your debtors are dragging their heels, like they are in this situation, then you could end up being penalised even further and you’ll end up with another problem of your own making.
If you fail to meet your end of the bargain when it comes to repayments, your bank is likely to reduce the amount that they’re willing to give you on future invoices. You’ll find that you’ll receive a diminishing percentage of an invoice if you can’t meet your obligations and therefore cashflow becomes a problem again. You’ll also be hit with higher charges.
My advice to you is to talk to an expert in credit control before you make any decisions. You will probably be better off outsourcing that function in the long term – a professional services company in this area is much more likely to recoup payments than you are yourself given that it’s their area of expertise.
Invoice discounting can help and it can be beneficial to a company if it is in a situation where clients make more regular payments than you are experiencing now. However, in this case, I would advise you to explore other options, like speaking with a specialist in credit control, before going down this route.
DCA Accountants and Business Advisors.
If you have a question that you would like answered, please email us at firstname.lastname@example.org and we’ll get back to you.
Individual’s names and company names will not be published in our Q&A section to protect privacy.
For more on our services or to receive a free consultation for your business from one of our experts, visit www.dca-ireland.ie or follow us on Twitter.