Why accounts payable finance could be right for your business

Accounts Payable Finance

Why accounts payable finance could be right for your business

44% of UK businesses see cash flow gaps as a potential threat to their business. Accounts payable finance provides a flexible, cost effective way for businesses to inject working capital into their cash flow cycle at an early stage. It allows growing businesses to improve supplier relationships, optimise commercial terms and processes, and increase their competitive edge. Let’s look at how it compares to other popular forms of alternative business finance, and why it could be the ideal finance solution for your business.

What is accounts payable finance?

Accounts payable finance (sometimes called ‘supplier payments finance’) refers to lending that concentrates on the payment of supplier invoices. It enters into the working capital cycle at an earlier point in the supply chain than other finance products, providing funds as and when required to fund opportunities, and pay suppliers and other creditors.

Accounts payable finance relies on the ability of the buyer business to repay the credit supplied, and does not rely on supplier or customer capacity or credit status. Businesses can take as much cash as required up to their assigned credit limit in order to pay whatever supplier invoices they choose. at a predetermined time of their choosing. Credit is usually offered up to 120 days and, once repaid, the revolving facility can be used, repaid and reused in line with the business cash needs.

Pay4’s business finance solution is an accounts payable finance facility that is designed for growing businesses, and provides working capital to settle supplier invoices. Once approved, it can be used again and again as part of a growth-oriented finance model. You can choose to pay a single invoice, or several together should you wish (as long as the value is above £5,000). You can pay any supplier both in the UK and abroad, in most currencies. Simplicity is at the heart of accounts payable finance, and thanks to online platform-based decisioning and payment models, once you are set up as a customer there is very little admin required.

How is it different from other forms of finance?

Supply Chain Finance

 With traditional supply chain finance, suppliers are involved in the financing process. Payments to suppliers are made against letters of credit confirming that the underlying contract conditions have been met. The financier takes a lien over the goods and follows these through the customers working capital cycle until payment is subsequently received, either from an invoice discounting facility or from the customers cash flow. This form of finance is often administratively time consuming, with associated fees in addition to normal interest charges. As a result, often, the product is more appropriate for larger businesses.

With an alternative accounts payable finance solution such as Pay4’s facility, the finance provider imparts a revolving credit limit that can be used as and when required to pay supplier or creditor invoices as they appear. Neither suppliers nor customers have any involvement in the finance arrangement. This reduces the administrative burden and makes it more cost effective for smaller businesses

Invoice Finance

Secured against unpaid customer invoices or entire invoice ledgers, invoice finance facilities are also called ‘accounts receivable finance’. Working on the other side of the coin to Supply Chain Finance, these facilities are inaccessible until such time as a customer invoice is raised by the borrowing business, at which point credit is drawn against the business’s customer invoices. Funds are made available up to a certain percentage of the invoice value. The finance provider (in the case of invoice factoring) or the business’s own credit control department then collects the invoice from the customer, and the balance is made available, minus fees.

When compared to accounts payable finance, invoice finance has limitations for growth-focused businesses. For example, invoice discounting does not help a business when it has up front costs it needs to fund before selling to a customer. Funding potential growth opportunities in advance  therefore becomes problematic. There are also limitations if there are overseas debtors, contract debtors, a cash-buying client base, or seasonal demand cycles.

Using unpaid customer invoices to secure the loans, these forms of finance are reliant on the capacity of the business’s customers to pay their bills. They can be more intrusive than accounts payable finance facilities, particularly when the entire ledger is factored in, because your customers will be made aware that you are using an invoice finance facility.

They often have monthly service fees, high arrangement fees, and onerous security and contractual obligations, including debentures and personal guarantees. With invoice factoring, you ‘sell’ your accounts receivable to a factoring provider (a ‘factor’). So they can also dictate the configuration of your customer base to protect themselves from debtor insolvency, and demand that only a certain percentage of your sales ledger is made up of a single customer.

If businesses have no invoices to draw credit from, or their business model or industry doesn’t fit the mold for invoice finance, they can now look to the other side of their bookkeeping. This is where accounts payable finance can either complement or replace these facilities.

Why it could be right for your business

If your business is experiencing healthy growth, yet is not particularly asset or customer-heavy, then accounts payable finance provides an unsecured, flexible injection of working capital to help fund your growth trajectory.

Flexible and discrete

Accounts payable finance facilities minimise or remove the involvement of your suppliers and customers from your financial activities. The finance provider only has to assess your ability to repay, rather than that of your customers or suppliers. Because the cash is delivered from the facility to your bank account, neither your customers nor your suppliers need know about your credit arrangement. Accounts payable finance facilities such as Pay4’s that are insurance-backed and not secured against your assets provide a low-risk, hassle-free option that rewards growing businesses and helps them succeed. Without taking security on your assets.

Optimises your business

Thanks to the simple, non-intrusive nature of accounts payable finance, many businesses use the injection of cash early in their supply chain to optimise their business for maximum revenue and growth. It bridges the gap between paying suppliers and receiving money from customers, and allows business to:

  • Take on larger projects/contracts knowing they can pay for the goods before they are sold on, an invoice raised and discounted
  • Secure supplier discounts and preferential terms due to early payment
  • Provide increased credit terms for customers
  • Smooth out demand cycles and prepare for spikes by funding optimised stock levels

Promotes growth, funds opportunity

Different to invoice finance facilities, 100% of the invoice value is provided, as long as it remains within your prearranged credit limit. You simply request the cash from your rolling credit facility, and it is placed in your chosen bank account, ready to pay the invoice. A simple, cost-effective transaction fee is paid, only when the facility is used. This ensures your extra working capital is primed and ready to fully fund opportunity when it arises.

Knowing you have the extra working capital available through a simple, flexible and rolling accounts payable finance facility gives businesses the confidence to invest, and promotes growth throughout the supply chain. It stops the ‘domino effect’ which occurs when businesses withhold or extend accounts payable to keep cash in the business – one company’s accounts payable is another company’s accounts receivable. If all parties hold their cash in accounts receivable, growth along the entire supply chain is inhibited.

Flexible and complementary

With no non-usage fees to penalise judicious or opportunistic use of the facility, accounts payable finance provides unrivalled flexibility. Businesses are able to incorporate accounts payable finance facilities into a cost-effective and flexible long-term cash flow strategy.

A flexible accounts payable finance facility can work either alongside or in replacement of your current finance arrangements. It gives you the ability to combine finance options to create the best arrangement for your business’s needs. This, coupled with the fact they do not rely upon unpaid customer invoices translates into reduced concentration risk and improved control over repayment.

If your business is growth-focused, then an accounts payable finance facility can provide the extra injection of cash at the right stage in your working capital cycle to fund opportunities, improve supplier relationships and boost growth.

Why Accounts Payable Finance could be right for your business