The cash hiding in your unpaid invoices

A company can sell more and still feel short of cash. Suppliers need paying, staff need paying and the next order needs materials, while the previous customer’s invoice remains outstanding.

Factoring addresses that interval. Afreximbank describes it as a form of receivables finance involving the purchase of amounts owed by buyers. The attraction is straightforward: a business may be able to release cash from a completed sale rather than wait until the customer pays.

Whether that works depends on the receivable.

An invoice needs a credible story behind it

The financier will want to understand the buyer, the underlying sale and the evidence that goods or services have been accepted. Disputes, deductions and uncertainty over when payment becomes due can undermine an apparently attractive invoice.

A growing order book is therefore only one part of the picture. Disciplined invoicing, delivery records and sales-ledger management can make the business easier to assess. They also help management identify whether slow collections are a financing issue or a commercial problem.

Read the economics, including responsibility

Structures differ. The allocation of buyer non-payment risk, collection responsibilities and any recourse to the seller must be understood in the actual agreement. Fees and discounts need to be assessed against the margin earned on the sale and the benefit of earlier cash.

Our view is that factoring deserves consideration where reliable customers take time to pay and the supplier has a profitable use for released working capital. It deserves less enthusiasm where disputed sales or weak margins are the real difficulty.

The objective is a healthier cash cycle. Financing an invoice should help the business fulfil the next sound order, rather than conceal a deteriorating customer relationship.