Invoice discounting facilities allow for better cash-flow management
By Tjivingurura Mbuende
Executive for Corporate and Investment Banking at Nedbank.
It is no secret that poor economic conditions and COVID-19 have a significant impact on business cash flow. Debtor difficulties have been a significant root of the problem, as business closures have been widely reported. As a result, running a business has become even more challenging, necessitating participation in cash flow management programmes.
Businesses now have a lot of money trapped in unpaid invoices, and entities of all sizes are scrambling to figure out how to access those funds to avert a negative cash flow curve. Invoice discounting is one method that businesses can use to offset negative cash flows.
Simply put, invoice discounting is a debtor management solution that aims to unlock the untapped growth potential in a debtor’s book. When a company’s unpaid invoices are used as collateral for a loan, invoice discounting is referred to as an invoice finance facility. It specifically allows them to leverage the value of their sales ledger.
In times of poor cash flow, which have led to businesses closing their doors or retrenching employees, invoice discounting is a crucial concept. According to data from the Ministry of Labour, Industrial Relations, and Employment Creation, 12,000 individuals were laid off from 896 enterprises in 2020; 9,158 of those cases, were due to economic factors. When invoices are unpaid, the business’s sustainability is threatened, and employees suffer.
Managing debtor’s accounts can be time-consuming and expensive. Cash flows are often a matter of timing, and even profitable businesses with a good strategy for collecting cash from their customers may experience cash flow pressures and eventually fail.
And in times when cash flows and debts are currently a pandemic in the operations of various businesses, companies are encouraged to explore any business-rescuing mechanisms available to them.
A survey done by the Namibia Statistics Agency (NSA) in 2020 indicated that 63,7% of businesses had reported revenue loss of over 50%, with the manufacturing sector (20,1%), hotels and restaurants (15,2%), and construction sector (11,3%) being affected the most.
This happened at a time when collecting cash from debtors was an almost impossible task due to a slowdown in business operations as the effects of COVID-19 worsened the troubles already created by poor economic conditions.
Suppose a business could access the money that is tied up in invoices due for payment. If that were possible, the business could negotiate better terms with suppliers or could gain access to much-needed working capital.
Boosting cash flow is necessary to enable the growth of a business; for example, when as bringing a new product to market, funding an expansion, or covering ongoing marketing expenses. Therefore, in these dire times, invoice discounting must be at the forefront.
And for it to happen successfully, it requires the backing of a financial institution. Nedbank Namibia has developed a concept of invoice discounting that is tailor-made for struggling local businesses.
The Nedbank invoice discounting program is created with a business’s sustainability in mind, to enhance process and cost-efficiency. It can assist a company in seizing an opportunity while at the same time making it possible to negotiate improved banking terms.
To date, Nedbank’s invoice discounting has released up to 80% of a company’s debtors’ book, making it an important solution for struggling enterprises to consider to maintain timely payment of salaries, expenses, and vendors’ invoices.
Many businesses look excellent on paper or in the eyes of the public, while their existence and prospects are being threatened by cash flow pressures. Such entities are encouraged to turn to invoice discounting for help.
To stimulate opportunities and growth for cash-strapped businesses, Nedbank invoice discounting further offers a critical funding source for expansion or paying for ongoing operational costs. It is especially helpful in preventing business owners from using their assets and savings to keep their companies afloat.
Partnering with a financial institution can equip a business better to manage debtors and absorb risk; for an SME it can materially improve the burden of debtor administration, and for a larger organisation it can perfect the discipline of optimal daily cash management.