What is working capital? – The capital used by businesses to fund day to day operations.
This can include all your credit options including bank overdrafts, credit cards, invoice discounting, upfront payments, installment credit or trade finance.
Longer term finance can include business loans or equity capital in your business.
A purchase order is an order form, issued by a buyer to a seller. When it’s accepted by the seller, it’s an agreement between buyer and seller on prices and quantities for a product or service.
Although a positive indication for a business, it can lead to problems for cash flow, primarily caused by two things.
Firstly, the business needs large funds to pay its suppliers to produce the goods for the order, a payment which is usually required prior to supplier production.
Secondly, the end customer usually has lengthy payment terms for the product they are receiving, in some cases this can be up to 120 days. Fulfilling this order requires the business to have substantial finance to fund production, until they get paid by the customer.
Purchase order finance, also known as ‘PO Finance’, provides funding for businesses with purchase orders to pay their suppliers and smooth out cash flow.
Purchase order financing is, therefore, an effective and popular option for those businesses which need a quick and effective way to finance their purchase orders.
In simple terms, trade finance is when an exporter requires an importer to prepay for goods shipped.
The importer naturally wants to reduce risk by asking the exporter to document that the goods have been shipped as proof.
The importer’s bank assists by providing a letter of credit to the exporter (or the exporter’s bank) providing for payment upon presentation of certain documents, such as a bill of lading.
The exporter’s bank may make a loan to the exporter on the basis of the export contract.
The delays and complications associated with trading overseas can be a huge burden on a business’s cash flow.
Keeping track of tariffs, freight rates and tax can add extra stress and cost to importing, giving you less time to think about your finances.
Import finance specialises in overcoming these challenges, leaving working capital free to invest into growing the business.
Accounts receivables finance unlocks the cash that is owed to the small company by selling the invoice. So, technically it is not lending, but an asset purchase. You are raising cash against your debtors. “Accounts receivable” is more of an expression used in the United States than the SA.
Invoice Discounting is a form of asset based finance which enables a business to release cash tied up in an invoice and unlike invoice factoring enables a client to retain control of the administration of its debtors.
Invoice finance is a collective term for the various types of invoice based lending such as invoice discounting, selective invoice discounting , invoice factoring and spot factoring.
This type of finance uses invoices as a way for businesses to unlock cash tied up invoices and therefore speeding up cash flow. This is done by selling their invoices to a third party who will advance some of the funds the invoice is worth up front, for a cut of the invoice.
Invoice trading and invoice discounting both help ambitious companies expand and grow.
They refer to the same essential process: an asset-based working capital solution that allows businesses to get advances on cash they are due from customers, rather than waiting for those customers to pay. Businesses can then invest in growth.
Invoice discounting has become a major source of working capital finance since the restriction of bank financing, as a result of the credit crunch. Invoice finance is more attractive to a bank because it depends on the collateral of the invoice due from the debtor.
Selective invoice discounting, is where individual invoices are sold to a third party at a discount to raise working capital .
Many companies require the whole turnover, meaning the company must factor their entire sales ledger. This can become expensive and not reflect the most cost effective solution for companies to raise their working capital.
Many small businesses have seasonal fluctuations in cash flow and so selective invoice finance would be a much cheaper solution.
Selective invoice discounting allows the owner of the invoice to select part of the invoice or only some of the invoices to discount.
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