Cash flow refers to the movement of money within a company. Cash flow can be defined as the sum of all accounts payable (outgoings) measured against accounts receivable (invoices).
To maintain a positive cash flow, you need more money coming into your company than going out, meaning that you can pay bills and invest in its growth without serious financial concern.
When a cash flow problem develops, a company owner has some crucial decisions to make. Luckily, there are several solutions out there to help struggling firms.
Companies, particularly those engaged in international trade, can quickly develop cash flow problems. There could be many reasons for this:
International traders can obtain cash flow financing solutions in a variety of ways.
Invoice financing involves a third-party finance company advancing money on unpaid invoices. This avoids cash flow problems caused by money being tied up for months in unpaid debts. The factor pays a proportion of the money up front to the Supplier and then passes on the balance (minus any service fees) later when the invoice is settled by the Buyer. The finance and costs are calculated based on individual invoice amounts.
Working capital loans help companies pay short- or medium-term operating expenses. These are loans that don’t come with excessive repayment schemes. The lump sum helps the firm to solve short-term cash flow problems while it gradually repays the loan, usually over a few months. The amount of finance depends on many factors, including credit history and turnover.
A business line of credit is a pre-agreed funding amount that can be drawn upon whenever required. Unlike a traditional business loan with fixed monthly repayments, credit line funds can be used when needed, such as for immediate expenses. Cash flow concerns can be eased by the knowledge that working capital is readily available. Secured lines of credit require assets as collateral for the loan. In contrast, unsecured lines of credit require no collateral.
Forfaiting is a specific trade finance service enabling Suppliers to sell invoices at a discounted price and receive immediate payment. Forfaiting and invoice factoring are similar but one key difference is that factoring provides a cash advance and the balance at a later date. In contrast, forfaiting can often cover the entire value. This helps Suppliers stay on top of their cash flow without worrying about non-payment from Buyers.
Companies may turn to fixed-term loans or overdrafts to bridge the gap between income and spending. Suppliers experiencing liquidity or cash flow challenges would need to present information for the bank to consider a bridging loan. Trade loans can be used for pre- or post-shipment financing, so they’re flexible options. The major drawback of these financing solutions is that it can often take months to be approved for a loan.
Cash-in-advance trading requires the Importer to pay cash to the Exporter before the goods are shipped. This type of financing provides security for the Exporter and eases worries about non-payment. However, while cash advances benefit Exporters, many Importers are reluctant to pay up front as it affects their cash flows. Importers could even begin switching to other Exporters willing to offer deferred payment terms, making it hard for exporting companies to stay ahead of the competition.
Companies experiencing cash flow problems can use one of the above financing solutions to bridge short- or medium-term financial needs.
However, as deferred trading terms and unpaid invoices are the cause of so many cash flow issues, many companies see solving such a common problem as the first step.
Invoice factoring is often a fast and easy solution for companies that trade internationally and have working capital tied up in unpaid invoices.
Using professional invoice factoring solutions, Exporters that trade internationally can receive:
Given the information in this cash flow guide, it’s clear that fast and flexible invoice factoring can solve many cash flow problems. However, not all international Suppliers will benefit from invoice financing and some may find alternative financing more suitable.
Therefore, Stenn recommends considering all finance options at your disposal to see which one works best for your specific cash flow issue.
If you are interested in learning more about invoice factoring, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of the subject. It is for information only and doesn’t constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.