Before it can sell a product, a business first needs labour, supplies, work space, tools, energy, and all of the other small things that make that business run. In short, it costs money to make more money. Initially, businesses normally deal with this issue by financing their operations with a bank loan, their personal savings, or investor support. Once a business is up and running, however, every further attempt to grow requires a similar investment.
Growth opportunities come in many different flavours; some are sudden and require a fast response, while others are entirely predictable, or even strategically engineered by the business. In all of these cases, though, businesses need to find a way to fund those growth efforts. At this stage, finding additional investors can become more difficult, and bank loans might either be inaccessible, or simply take too long to process. Instead, businesses rely on alternative tools such as supply chain and invoice finance to come up with the capital they need without taking on any additional liabilities.
Off-balance sheet financing allows businesses to fund themselves
Rather than taking funds from an outside source, off-balance sheet financing allows businesses to finance themselves. The best ways to do this is, instead of taking on debt, to modify the times at which payments are issued with supply chain finance, and when revenues are received with invoice finance.
Invoice finance allows a business to get paid as soon as an invoice is issued, rather than when the associated payment is actually due. This is done by trading the invoice to a financier in exchange for an up-front payment. The financial institution then collects the payment on its own, after which any remaining funds are paid out. Supply chain finance, on the other hand, works by extending payment terms. Rather than paying directly, a business’ supplier payments are handled by a third party financier, who then extends a longer payment term of up to 90 days to the business. Used in conjunction, this allows businesses to fund short term growth efforts without any additional investment of capital.
Making the most of growth opportunities
Supply chain finance allows a business to finance payments to suppliers and workers 90 days before any actual payment needs to be made. This gives them the critical time they need to begin generating revenue from a growth opportunity. Of course, 90 days isn’t always enough time for this, considering that a large client might take 90 days just to pay an outstanding invoice. This, though, is where invoice finance comes in.
Instead of waiting for a client to pay, the business can simply finance its invoice as soon as it is issued. As long as the product or service can be brought to market and sold within 90 days of the date that a respective supplier payment is due, it can be financed using this method.
Take advantage of short term opportunities
When a growth opportunity, such as an unexpectedly large client, comes knocking, businesses need to act fast. In order to expand their operations to accommodate the additional work, they need to immediately purchase supplies, and potentially hire additional workers. Traditional loans simply take too long to be an effective financing tool in this type of situation. Moreover, taking on new liabilities for short term gain can lead to a messy balance sheet, which can impact the business’ ability to finance future growth through traditional means. Off-balance sheet tools like invoice finance and supply chain finance, on the other hand, provide businesses with the funds they need right away, and without impacting their balance sheets.
Boost capacity for seasonal work
Of course, growth opportunities don’t always have to be sudden and unexpected. Many seasonal opportunities, such as major holidays or literal seasons, represent predictable fluctuations in consumer demand. In order to take full advantage of a seasonal boost, businesses need to be able to invest in themselves. Some retailers, for example, generate the bulk of their revenues during the holiday season. After a rough summer, though, businesses often don’t have the funds to make the most of the holiday rush.
Besides these short term options, businesses can also use these tools to fully finance their entire regular production process. In effect, the business can ensure that supplier payments are not due until after the revenues that those supplies generated are collected. This allows businesses to recover the funds that they were previously using to finance their operations, and to redirect it toward funding growth.