Here’s an update from URICA, the MIA’s supply chain finance partner.
Following the launch to the industry at the start of the month (click here), here is a useful article detailing how URICA’s service differs from invoice discounting.
The one issue that scares SME business owners is a lack of cash flow. Cash is everything: it’s the fuel that keeps businesses running. However, just like a car running out of petrol, when a business runs out of cash it grinds to a halt. And it may be terminal.
A healthy cash flow breeds confidence. When business owners have confidence they invest, they take on new employees, and they develop new products. An unhealthy cash flow creates uncertainty. When business owners are uncertain and nervous they resist taking on big projects and they stop investing.
Cash-flow problems occur when your supply chain doesn’t function properly. If you’re supplying a business that pays you in ninety days but you have to pay your supplier in thirty days, there’s sixty days where you’re in deficit. If this is a big-ticket contract you can run into big trouble.
In the past, you may have taken this outstanding invoice to an invoice discounter to raise funds to ease your cash flow. But you now have an alternative: supply chain funding. You may already be saying to yourself, ‘Same thing different name.’ It’s not. Here are three reasons why supply chain funding is superior to invoice discounting.
1. Supply chain funding creates cash in your supply chain
This is the key difference: supply chain funding is cash and invoice discounting is debt.
If you’ve ever used invoice discounting you’ll know it’s a bit like the business equivalent of pawn broking, except you’re not offering up the family silver, you’re offering up your unpaid invoices. But there’s a difference: silver has a value so you can probably raise a bit more. An unpaid invoice has no value; it’s only worth something when it turns into cash – when it’s paid. So the invoice discounter will want some security, like a personal guarantee or a charge on your home. Even then you’ll be lucky to raise 70% of the face value of your invoices.
Remember, you’ve only borrowed against your invoices and you need payment to repay the invoice discounter. If your customers default, you can’t pay your debts. Unlike the family silver, which has a resale value, your unpaid invoices are worthless, so the invoice discounter will come after you personally for payment.
Imagine your customer doesn’t take ninety days to pay but says to you, ‘How quickly would you like me to pay you?’ Wouldn’t that be wonderful? Surely this is pie-in-the-sky thinking. It’s not. This is exactly what URICA’s supply chain funding does – it allows you to be paid cash for your invoices as quickly as you like. All for a small discount.
2. Supply chain funding is simple
There are two areas where you can easily build complexity into a product: the fees and the contract.
Invoice discounting is expensive. Not because it has a single high-cost fee, it’s because it has many different ways of charging that all add up to a large bill. URICA’s supply-chain funding has a single charge – a small discount that it deducts from your payment. What determines the size of the discount is simple to understand too: the quicker you want to be paid, the higher the discount. You can play around with this using the discount calculator.
As for contracts, URICA has managed to keep this to around two pages of simple English. And you can opt in and out as often as you like. An invoice discounting contract is long and tedious and will tie you up in knots.
3. Supply chain funding gives you certainty
The difference between cash and debt is you don’t owe anybody any money. When you use URICA’s supply chain funding it’s as if your customer has paid your invoice. Should your customer ultimately not pay URICA it’s not your problem; it’s not your loss.
Contrast this with invoice discounting where all you’ve done is borrow against an outstanding invoice. If that invoice remains outstanding your business has to find money from elsewhere to repay the debt. If it can’t, it will fall to you personally.
Supply chain funding gives you certainty because you’re not wondering if your invoices will be paid. Certainty breeds confidence, and confidence is good for business.