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Should I consider either invoice factoring or invoice financing to help improve my cash flow?

Cash flow is a big issue right now and our resident agony (Dutch) uncle offers advice about whether you should turn to an invoice payment service for help.

Should I consider either invoice factoring or invoice financing to help improve my cash flow?

A few companies have asked me my thoughts on this subject, quite possibly as everyone I speak to is taking a look at how much cash their business has in the bank a lot more closely than they ever have done before.

By way of explanation, invoice factoring is where a factoring provider pays you most of the amount of an invoice you are issuing there and then, instead of you having to wait weeks or months to get paid. The factoring company then goes and takes over the collection process and keeps a percentage of the invoice value as its fee.

With invoicing financing, it is a little different. A lender pays you the full invoice amount when you issue it which you then repay, plus interest, when you get paid. You retain full control of the collection. It is basically using the invoice as collateral.

These methods of financing are very popular because the cash arrives quickly. They are particularly useful for smaller businesses without accounts people to chase down invoices.

However, perhaps call me ‘old fashioned’, but I don’t think that invoice factoring in particular gives out a good vibe in the agency world. It was originally designed for the manufacturing industry, laden with lots of up-front capital and equipment cost. It made sense. For businesses involved in the provision of services, without too much to lay out in advance, I have always viewed them therefore as an emergency measure.

My perception would be that if I received an invoice from a PR agency with the payment due to a factoring company, I would be worried about that agency and their cash position. It would perhaps dent my confidence in them to an extent.

So, if you’re desperate then of course use these services. Preferably invoice financing. Alternatively, look at what other steps you can do to improve your cash flow or potentially investigate other forms of finance such as a loan or maybe release some equity for cash.

Written by Graham Goodkind who is a Dutch Uncle – a new type of non-exec business adviser – to several agencies in the marketing services sector, in addition to being founder and chairman of Frank.

If you have got a question for our agony (Dutch) uncle regarding any issue relating to the running, operations, business or financial aspect of a PR agency, either as an owner, manager or executive, then email and your question will be featured in a coming issue.

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