Are you Borrowing Money You Already Have?
When cash flow becomes tight, many business owners look for a quick solution.
Debtor or invoice finance is often marketed as exactly that—a fast and flexible way to unlock cash tied up in unpaid invoices. And in the right circumstances, it can be an effective funding tool.
But here’s the question every business owner should ask before signing a finance agreement:
Do you really need to borrow against your receivables, or is your business simply not managing its working capital effectively?
In our experience, many businesses rely on debtor or invoice finance to solve cash flow problems that could be significantly reduced—or even eliminated—through better working capital management.
The result is not only stronger cash flow, but improved profitability.
The Hidden Cost of Easy Finance
Accessing funds through debtor or invoice finance can seem relatively straightforward. However, the true cost is often higher than business owners expect.
In addition to interest, there may be establishment fees, service fees, administration charges and ongoing facility costs. Individually they may not seem significant, but together they can have a material impact on your bottom line.
Many businesses simply accept these costs as part of doing business.
The question is—do they have to?
Working Capital Is About More Than Cash
Working capital management is simply about making the most effective use of the cash already flowing through your business.
That means understanding and actively managing:
- Accounts receivable (AR) – getting paid promptly and reducing the number of days customers take to pay.
- Accounts payable (AP) – negotiating sensible payment terms and making appropriate use of those terms without damaging supplier relationships.
- Inventory – avoiding unnecessary cash being tied up in excess stock.
- Work in progress – ensuring projects are billed promptly.
- Cash flow forecasting – identifying future funding requirements before they become urgent.
But one of the most useful measures is often overlooked:
What’s the gap between the number of days it takes your customers to pay you and the number of days you have to pay your suppliers?
Mind the AR/AP Gap
Consider a business where customers take an average of 60 days to pay, while suppliers are paid in 30 days.
That creates a 30-day funding gap.
For an entire month, the business effectively has to fund the difference itself—paying wages, suppliers and operating expenses before it receives the cash from the sales that generated those costs.
As the business grows, that gap can become increasingly expensive. More sales can actually mean more cash is required to fund the business.
This is often where overdrafts, debtor finance and other working capital facilities enter the picture.
Now imagine that the same business:
- reduces its AR days from 60 to 45;
- negotiates appropriate supplier terms that increase its AP days from 30 to 45; and
- actively monitors both measures.
The 30-day working capital gap has potentially been eliminated.
The ultimate objective, where commercially achievable, is to have AR days lower than AP days—collecting cash from customers before the corresponding supplier payments fall due.
That can fundamentally change the cash dynamics of a business.
You Have Revenue and Profit Targets. What About Working Capital Targets?
Most established businesses have annual revenue targets.
Many have profit or EBITDA targets.
But how many have a target for AR days or AP days?
And how many review those numbers every month?
A simple working capital dashboard can make these measures visible and actionable.
Rather than discovering there’s a cash flow problem when the bank balance gets low, management can track indicators such as:
- AR days
- AP days
- the gap between the two
- overdue receivables
- customer payment trends
- supplier payment terms
- inventory days, where relevant
- cash conversion cycle
Management can then set targets, monitor trends and take corrective action before a cash shortage develops.
What gets measured is far more likely to get managed.
Don’t Try to Fix 100 Customers or Suppliers
There’s another important point.
Improving working capital doesn’t necessarily mean chasing every customer harder or renegotiating terms with every supplier.
A business might have more than 100 suppliers, but perhaps 20 of those suppliers account for 80% of its total expenditure.
The same principle can apply to customers. A relatively small number may account for most of the company’s outstanding receivables—or most of its late payments.
That’s where a deeper analysis becomes valuable.
Instead of relying on gut feeling, management can identify:
- Which customers account for the largest receivable balances?
- Which customers consistently pay late?
- Are payment terms appropriate for those customers?
- Which suppliers account for the majority of expenditure?
- What payment terms have been negotiated with those key suppliers?
- Where would changing terms have the greatest impact on cash flow?
This allows management to focus its effort where it will make the biggest difference.
You don’t necessarily need to change 100 relationships.
You need to identify the handful that are driving your working capital position.
Finance Should Support Growth—Not Fund Inefficiency
There will always be situations where debtor or invoice finance is entirely appropriate.
Rapid growth, seasonal businesses, acquisitions or major contracts can all create legitimate short-term funding requirements.
The problem arises when finance becomes a permanent solution for an underlying working capital problem.
If your business continually relies on external funding simply to pay suppliers, meet payroll or cover everyday operating costs, it’s worth asking whether the finance is solving the problem—or simply masking it.
Better Working Capital Means Better Profitability
Improving working capital management isn’t just about improving cash flow.
It can mean:
- reducing finance costs
- improving profitability
- strengthening cash reserves
- increasing financial flexibility
- reducing reliance on lenders
- creating a more resilient business
Most importantly, it allows business owners to retain more of the profit they’ve worked so hard to generate.
Before Signing Your Next Finance Agreement…
Take a look at your numbers and ask:
- What are our current AR days?
- What are our current AP days?
- How large is the gap between them?
- Do we have targets for improving both?
- Which customers are having the biggest impact on our receivables?
- Which suppliers account for most of our expenditure?
- Could changing terms with a relatively small number of customers or suppliers materially improve our cash position?
- Are we measuring all of this on a working capital dashboard?
Often, the answer isn’t finding another lender.
It’s understanding where your cash is getting stuck—and doing something about it.
At the end of the day, debtor and invoice finance are valuable tools when used strategically. But they shouldn’t become a substitute for effective working capital management.
A deep dive into your customers, suppliers and working capital cycle can reveal opportunities that aren’t immediately obvious from your profit and loss statement.
Because before you borrow more money, it’s worth finding out whether there’s already cash trapped inside your business.
The cheapest finance is often the finance you never need to use.
