Bridging finance for businesses waiting on large invoices

When a South African SME delivers a bulk order, the invoice may be R1.5 million, but the client’s payment terms stretch to 45 days. During that period the company must still pay staff, rent, utilities and tax submissions, which can quickly deplete available working capital.

Bridging finance offers a short‑term solution that allows firms to access the cash they need while awaiting invoice payment. According to the South African Revenue Service, cash‑flow problems are the main reason many businesses fail, not a lack of profit. By drawing on a bridging facility, a company can meet its obligations, stay compliant with SARS and B‑BBEE requirements, and avoid the risk of defaulting on payroll or rent.

The benefits of bridging finance

Bridging finance offers several benefits to businesses waiting on large invoices. One of the main advantages is that it provides quick access to funds, often within a matter of days. This can be particularly useful for companies that need to meet urgent financial obligations, such as paying staff salaries or meeting tax deadlines. Bridging finance can also be used to take advantage of new business opportunities, such as purchasing new equipment or hiring additional staff.

Another benefit of bridging finance is that it can be used to improve a company’s credit rating. By repaying the loan on time, businesses can demonstrate their creditworthiness to lenders, making it easier to access finance in the future. Additionally, bridging finance can be used to consolidate debt, reducing the number of loan repayments and making it easier to manage cash flow.

For example, a company with an annual turnover of R5 million may be waiting on a large invoice of R1 million from a client. However, the company needs to pay its staff salaries of R200,000 per month, as well as other expenses such as rent and utilities. By using bridging finance, the company can access the funds it needs to meet these expenses, even if the client is taking 60 days to pay the invoice.

A real-life example of bridging finance

Let’s consider a real-life example of a company that used bridging finance to alleviate cash flow problems. ABC Pty Ltd is a small business that provides services to large corporations. The company has an annual turnover of R10 million and is waiting on a large invoice of R2 million from one of its clients. However, the client is taking 90 days to pay the invoice, and ABC Pty Ltd needs to meet its financial obligations in the meantime.

ABC Pty Ltd applies for bridging finance and is approved for a loan of R1.5 million. The loan is repayable over 6 months, with interest charged at 15% per annum. By using the bridging finance, ABC Pty Ltd is able to meet its financial obligations, including paying staff salaries and other expenses. Once the client pays the invoice, ABC Pty Ltd repays the loan, including the interest charged.

How to apply for bridging finance

Applying for bridging finance is a relatively straightforward process. Businesses can apply online or through a financial advisor, providing basic information such as company details, financial statements, and invoice details. The lender will then assess the application, considering factors such as the company’s credit history, cash flow, and invoice value.

For example, a company applying for bridging finance may need to provide the following documents: company registration documents from the Companies and Intellectual Property Commission, financial statements, invoices, and a copy of the contract with the client. The lender may also require additional information, such as a business plan or cash flow forecast.

It’s also important to note that bridging finance is subject to the National Credit Act and the Protection of Personal Information Act. Lenders must comply with these regulations, ensuring that borrowers are treated fairly and that their personal information is protected.

Common mistakes to avoid when using bridging finance

While bridging finance can be a useful tool for businesses waiting on large invoices, there are several common mistakes to avoid. One of the main mistakes is not fully understanding the terms and conditions of the loan, including the interest rate and repayment terms. Businesses should carefully review the loan agreement, ensuring they understand all the costs and obligations involved.

Another mistake is not having a clear plan for repaying the loan. Businesses should ensure they have a solid cash flow forecast, demonstrating how they will repay the loan once the client pays the invoice. This will help avoid defaulting on the loan, which can damage the company’s credit rating and lead to further financial difficulties.

Additionally, businesses should avoid using bridging finance as a long-term solution to cash flow problems. While bridging finance can provide quick access to funds, it is typically more expensive than other forms of finance, such as overdraft facilities or term loans. Businesses should consider other options, such as Small Enterprise Finance Agency loans or invoice discounting facilities, which may be more suitable for their needs.

For instance, a company with a large invoice of R500,000 from a client may be able to use invoice discounting to access up to 80% of the invoice value, providing much-needed cash flow. This can be a more cost-effective option than bridging finance, particularly for companies with a high volume of invoices.

• Review the loan agreement carefully, ensuring you understand all the costs and obligations involved.
• Have a clear plan for repaying the loan, including a solid cash flow forecast.
• Avoid using bridging finance as a long-term solution to cash flow problems, considering other options such as invoice discounting facilities.

Conclusion and next steps

In conclusion, bridging finance for businesses waiting on large invoices can be a useful tool for alleviating cash flow problems. By understanding the benefits and risks of bridging finance, businesses can make informed decisions about whether to use this type of finance. To determine if bridging finance is right for your business, see if your business qualifies for funding in 60 seconds. This will help you determine whether bridging finance is a viable option for your company, and provide you with the necessary funds to meet your financial obligations while waiting on large invoices.