Not-for-profit organisations face many of the same challenges as their profit-driven counterparts. The most significant of these is usually cash flow, because very few operations enjoy a perpetual surplus of funds.
Without enough cash, an organisation can’t employ staff, rent premises, buy services or market itself to potential customers. Nor can it expand operations or bridge the gap between paying suppliers and getting payment in from customers.
There are as many forms of raising this cash that are available to non profits as there are to fully commercial organisations. Invoice factoring, overdrafts, bank loans and personal loans are all common ways of raising working capital.
How invoice factoring works for non profit organisations
The principle of invoice factoring is that the lender advances funds against the value of an invoice raised on another organisation. The amount advanced is typically between 70% and 90%, with the balance being paid over, less a small fee, once the debt is settled.
This makes invoice factoring accessible to any form of business, whatever its profit motive and legal form, which offers credit terms to other organisations.
For example, a Community Interest Company (CIC) may run a room hire and conferencing service on behalf of a community building. Their customers could include local businesses and councils, who are given credit terms of 30 days.
These invoices could be eligible for invoice factoring – allowing the CIC to raise valuable working capital, either to pay suppliers or invest in the development of new services or markets.
Invoice factoring can cover cash flow shortfalls
As with fully commercial businesses, a not-for-profit can run into cash flow problems at any time during its lifecycle. The sudden failure of a major customer or the unexpected withdrawal of bank overdraft facilities can pull the plug on its work capital, draining cash to the point where business continuity is threatened.
At a time like this, invoice factoring could, literally, save the business. It allows the organisation to unlock the cash that’s tied up in unpaid sales invoices. Even an advance of 70% against sales ledger debts of just £10,000 will inject £7,000 into the business. This could be enough to, say, run the next payroll or ensure HMRC payments are made on time.
Other benefits of invoice factoring to non profit organisations
Factoring isn’t just about improving working capital. It can also help reduce the burden which credit control often places on businesses.
The factoring funder will take over responsibility for debt chasing, releasing the organisation’s staff for potentially more productive activities. Factoring can also free up management time, as less time needs to be spent addressing cash flow issues. That’s not to say there’s no need for ongoing cash flow planning, but some of the urgency, and stress, is taken out of it.
Many of today’s factoring arrangements are available on the basis of a three month rolling contract. There is no need to be tied into a 12 month arrangement if that’s not required.
Any non profit organisation considering invoice factoring should take care to review the different options available in order to find the deal, and funder, best suited to their needs.