What Small Business Directors Need to Know About New Insolvency Rules
With the door closed on 2020, directors no longer have the protection of the “COVID Safe Harbour” insolvency rules put in place to deal with the impact of the pandemic.
These rules, which absolved directors from personal liability if their businesses traded while insolvent, have been replaced by legislation that includes a new, streamlined SME restructuring process that came into force on January 1.
- As of January 1st, directors no longer have the protection of COVID Safe Harbour. This means if a company with debts and due payable is not able to pay, they are technically insolvent, and its directors are at risk for debts incurred by the company.
Why it changing?
- To make restructuring a less complex and less expensive process for many businesses. However, SMEs should be aware this will very likely have a negative impact on cashflow.
What do company directors need to do?
- Talk to a professional about the consequence of restructuring
- Be aware of the potential cash flow impact
- Find funding that will assist in this situation
- Put the funding in place now – before you need it
The role of trusted advisors
An accountant will record and review your overall financial situation and provide recommendations for improving the health of your financial books. They will have relationships with banks and alternative finance providers and be able to connect you with the right solution for your business
A finance broker will help to review your current finance options and identity new funding opportunities to assist in business growth or refinancing.
An insolvency practitioner will help in complex situations or when companies are facing acute financial stress. A solution may involve a company restructure, in which an insolvency practitioner will look for a finance provider who can help turn the business around.
A finance provider can directly help you find the right funding solution for your business, taking in to account your company size and stage in the business life cycle. This could be a bank, a fintech or an alternative financier like ScotPac.
What’s the solution?
- Having a funding solution in place will give businesses the best chance of turnaround success. There are many restructuring solutions available that can be established quickly and without red tape. Funding such as Invoice Finance will be in demand as this type of finance provides business owners with quick access to cash flow, using outstanding sales invoices as security instead of the family home.
- Our FactorONE product is a lending solution suited for this environment, providing access to funds within 48 hours and a low-document application process with no property security required.
- We have the ability to lend higher limits (over $2 million) and SME borrowers have the security of the trust and reliability that comes with ScotPac having funded the small business sector for more than 30 years.
We’re all willing 2021 to be a kinder year to the small business sector than 2020. However things pan out, it’s important for SME directors to be prepared.
Even if a small business is not at the crisis point now, acting now to get in place a suitable style of funding means it is ready to draw down from, if and when the need for restructuring arises.
What is Business Finance?
Whether you need a large lump sum to fund your expansion plans or regular access to credit to help you manage cash flow, being able to raise capital is key to business growth.
If you don’t have the resources to self-fund your business plans, you’ll need to look at third-party funding sources. That’s where business finance comes in.
Types of Business Finance
Business finance is an umbrella term that covers a wide range of financing solutions. The majority of these funding sources fall into two categories: debt finance and equity finance.
You may find that a combination of debt and equity finance can provide the short-term and long-term funding you need to accomplish your business goals.
What is Debt Finance?
Debt finance is a broad category that typically involves a lender providing funds that you later repay plus interest and fees. For traditional debt finance solutions like a bank loan, you will need to provide collateral to secure funding.
There are more flexible alternatives such as invoice finance that don’t require you to use your home as security.
Types of Debt Finance
There are a wide range of debt finance solutions that can be tailored to your business needs and circumstances.
Traditional loans are one of the most well-known forms of debt finance. You receive a lump sum from the lender and repay the principal plus interest and fees over the loan term. Loans are best used for significant business purchases and are usually only accessible to businesses with a long trading history and good credit rating.
Lines Of Credit
A line of credit is more flexible than a traditional business loan. The lender will set a credit limit that you can draw against as and when you need. You will usually be charged interest and a monthly fee for the facility. As you make repayments, the funds become available for use again.
For manufacturing and import/export businesses, a line of credit can sometimes be combined with an invoice finance facility to provide funding for cash flow gaps of up to 180 days.
Read more about Trade Finance Solutions.
Business Credit Cards
A business credit card works in the same way as a personal credit card. You apply for the card, and the lender sets a credit limit. You can use funds up to the credit limit and make monthly repayments on the principal and interest. Some card providers also charge a flat monthly or yearly fee.
Invoice finance is a flexible type of business finance that allows you to turn your accounts receivable into a source of fast funding. You can get an advance of up to 95% of your outstanding invoice value.
There are two main types of invoice finance: invoice discounting and factoring. In simple terms, discounting uses your unpaid invoices to access a revolving line of credit based on your outstanding invoices’ value.
Factoring works in a similar way, but the finance company takes over the collection of the unpaid invoice.
You can find out more about factoring and discounting in our blog post Invoice Discounting vs Factoring.
Invoice finance can be a good option if your business is cash hungry and has a lot of capital tied up in unpaid invoices.
If you are looking to purchase new or second-hand machinery or vehicles for your business, equipment finance can be an efficient way to spread the cost over a longer period. You can use the asset you intend to purchase as collateral for the finance.
An equipment finance facility usually involves the lender purchasing the asset for your business. You then make regular repayments on the principal and interest. Depending on the agreement’s terms, you may own the asset after your final payment, or you may be offered to buy the asset for a nominal fee.
Debt Finance Pros & Cons
Pro – Keep Full Control of Your Business
You don’t need to give up any equity or have anyone else involved in the decision making at your business. All profits generated are yours and don’t need to be shared with a third party.
Pro – Wide Range of Solutions
Debt finance can be beneficial at every stage of your business journey. You can secure a lump sum to fuel expansion or a flexible revolving line of credit to support working capital as you grow.
Pro – Tax-Deductible
The repayments on debt finance can be used as a deduction on your tax return to reduce your taxable income.
Pro – Easier to Access
In comparison to equity finance, debt finance solutions are much easier and faster to access.
Con – Hard to Qualify for a Business Loan
Banks have strict lending criteria that make traditional loans out of reach for many small businesses. According to the Reserve Bank of Australia, 90% of loans to SMEs are secured, compared to around two thirds of large business loans.
If you don’t qualify for a business loan, an invoice finance or equipment finance facility could provide the funding you need.
Con – Cost
There are always fees involved with debt finance. Even if your business has a long trading history and strong credit rating, you’ll need to pay interest and fees on the money borrowed.
Con – Restrictions on How You Can Spend the Money
If you qualify for a business loan, the lender may place restrictions on how you can spend the money. Invoice finance and other alternative debt finance solutions don’t impose these restrictions.
What is Equity Finance?
Equity finance is when you reach a funding agreement with a third-party investor, rather than a lender. In exchange for providing funding, the investor will take shares or part ownership in your business. As the company makes sales and brings in revenue, you will need to share your profits with the investor.
Types Of Equity Finance
While equity finance isn’t as varied and flexible as debt finance, there are several options you can pursue to raise capital.
Venture capitalists are investment companies willing to provide funding for equity in growing companies that can deliver high returns. Most venture capitalists look for innovative startups that have the potential to disrupt an industry or become a nationwide business.
On average, venture capitalists invest $7M in a company. For the majority of small to mid-sized businesses, this type of finance is very hard to access.
Angel investors have some similarities to venture capitalists. Both are willing to invest in growing businesses in exchange for equity. The main differences are that angel investors tend to work alone and use their own money to fund their investments.
The amount they are willing to invest is much lower than venture capitalists on average. To find an angel investor, you need to put together a detailed business plan and network to find high net worth individuals willing to invest in your business.
This form of equity finance has grown in popularity over the last decade. There are plenty of online platforms that allow businesses and potential investors to connect. Innovative startups and tech companies tend to do well with crowdfunding, with Oculus VR and MVMT Watches two noticeable examples of successful companies that started with crowdfunding investment.
As with all types of equity finance, you will need to exchange shares or part-ownership of your business.
Equity Finance Pros & Cons
Pro – Less Risk
The investor takes on most of the risk with equity finance. They will only receive a return on their investment when your business grows and generates more profit.
Pro – Less Initial Costs
There are no fees or interest payments with equity finance. You can invest the money into your business without worrying about paying it back. However, you will need to share your future profits with the investor.
Pro – Access Experience and Expertise
Finding the right investor can provide much more than capital investment. You can leverage their industry knowledge, connections, and experience to fast track your business growth.
Con – Shared Profits and Ownership
When you give away shares or part-ownership in your business, you need to split your future profits and surrender some of your control over decision making.
Con – Hard to Find
It can be very challenging for the average business to find an investor. You’ll need to prepare a detailed business plan and pitch, and be willing to look for potential investors continuously. If you need a short-term cash flow solution, debt finance is a much more suitable option.
Which Type of Business Finance is Right for Your Business?
If you need to raise capital urgently, debt finance is much more accessible. You can be approved for an invoice finance facility and receive a cash advance in as little as 24 hours. Depending on your credit rating and trading history, a traditional business loan or equipment finance can be a good solution for your long-term funding needs.
Generally, equity finance is a long-term funding solution that is harder to access. Be prepared for a long process of finding the right people to invest in your business. If you plan to grow to a national level and you’re willing to share ownership and profits, equity finance may be a good option.
ScotPac Business Finance
As with any business decision, it’s always a good idea to explore your different options before committing to a financing solution. Here at ScotPac, we offer a range of debt finance solutions to help you access the fund you need.
Every business is different, and we’re here to guide you through your options and find the best solution for you. Give us a call and speak to one of our business finance experts today.
What is Invoice Finance?
Invoice Finance is a funding solution that enables businesses to use their outstanding invoices to access an immediate cash flow boost.
Extended payment terms and slow-paying clients often result in a cash flow gap for businesses that provide net terms to their customers. This is a significant issue for businesses in Australia.
In our SME Growth Index Insight Series – Rebounding from COVID-19: towards 2021, we asked SMEs to name the top three factors that would help the small business sector rebound from the COVID-19 recession.
Federal Government legislation on 30-day payment terms was the second most popular factor, named by over 46% of small businesses.
Invoice finance is a way for businesses to overcome these issues and fuel growth with predictable cash flow, rather than worrying about working capital and chasing unpaid invoices.
How Invoice Finance Works
When you sell goods or complete work for another business, they will typically have 30 days or more to settle your invoice. You have paid out for staff, supplies, and materials to complete the order, but you won’t receive payment to cover your outlay for a month or more causing a cash flow gap.
Invoice Finance helps you to bridge cash flow gaps. You can access up to 95% of the invoice value upfront, with the remaining balance less fees released once your customer has paid.
Here’s how Invoice Finance works in 5 simple steps:
- You fulfil the order and invoice your client as usual.
- You submit the invoice to the finance provider.
- The finance company advances up to 95% of the outstanding invoice value to your bank account.
- Depending on the type of arrangement, the finance company handles the invoice collection, or you collect payment from your customer as usual.
- You receive the remaining balance of the invoice less fees.
Invoice finance is a flexible funding solution and can involve a single invoice or your entire accounts receivable.
Invoice Finance in Australia
The use of invoice finance in Australia is increasing but is still relatively unknown and underutilised compared to our international peers.
Invoice finance volumes total 3.9% of GDP in Australia, compared to 19% of GDP in the UK.
This is despite Australian businesses suffering from amongst the highest rates of late payments in the world. According to the ASBFEO, Australian companies are paid 26.4 days late on average compared to 5.85 days late in the UK and 7.1 days late in the US.
Types of Invoice Finance
There are many different invoice finance funding options, but all of these solutions fall into two categories: factoring and discounting.
Invoice factoring typically involves the sale of the accounts receivable ledger or selected invoices. You can receive up to 95% of the outstanding invoice value as an advance, with the remaining balance less fees transferred after collection.
With invoice factoring, the finance company is responsible for collecting on the outstanding invoices. Your customers will usually be aware of your relationship with the finance company.
Invoice discounting allows a business to access a line of credit using its accounts receivable as collateral. You can access up to 85% of the value of your outstanding invoices upfront, with the balance less fees released once payment has been collected.
With this type of funding facility, you retain the responsibility for collecting on unpaid invoices. This can be beneficial if you have a dedicated accounts and collections department, or if you want your relationship with the finance company to remain confidential.
Selective Invoice Finance
Selective invoice finance allows you to arrange financing for a selection or single invoice, rather than your entire accounts receivable. Also known as spot factoring, this type of invoice finance can be beneficial for businesses with a smaller volume of high-value invoices.
You can turn your selected unpaid invoices into an immediate cash flow injection to help you pay suppliers, cover of overheads, and fund operations to fulfil new orders.
How Much Does Invoice Financing Cost?
The cost of invoice finance depends on the type of facility, and the risk involved for the finance company. Several factors can influence the costs of financing an invoice, including:
- The creditworthiness of your customers
- Your industry
- The number of invoices you want to finance
- The length of the funding facility
Generally, invoice discounting is cheaper than invoice factoring. This is due to the additional account management and collection services associated with factoring. You will typically pay more for a longer funding facility, with net-30-day invoices costing less to finance than a net-90 day invoice.
The Pros and Cons of Invoice Finance
Invoice finance is more accessible and flexible than a traditional business loan or credit card, but it has pros and cons you should be aware of before you apply for funding.
Pro – Fast Cash Injection
The most significant advantage is the ability to improve cash flow quickly. With increased working capital, you can be in a better position to negotiate bulk discounts with suppliers, reinvest in your business, and capitalise on opportunities.
Pro – No Ongoing Repayments
You can quickly raise funds without worrying how repayments will impact your working capital at a later date.
Pro – No Need to Use Your Home as Security
Unlike a business loan, you don’t need to use your home or personal assets as collateral to access funding.
Pro – Predictable Working Capital
You can be confident in your decision making with the knowledge that you have enough working capital to take on new staff, purchase new equipment, and support your business growth.
Pro – Flexible Funding
Instead of loading long term debt onto your business, you can tailor invoice finance to your needs with no minimum term contract. You can use the facility as a flexible line of credit that grows in-line with your business.
Con – Limited to the Value of Invoices
You can only secure funding up to the value of your accounts receivable. If you need a large lump sum for significant business purchase, equipment finance or asset finance may be a more suitable solution.
Con – Cost
An invoice finance facility will take up some of your sales invoice profit margin. You can use a cash flow forecast to ensure that improved cash flow will offset the invoice finance facility’s cost.
You can read our guide on how to create a cash flow forecast here.
What Happens if My Customer Doesn’t Pay the Invoice?
It depends on the terms of your funding arrangement. In most cases, you will be responsible for the costs of any bad debt. The finance company will carry out due diligence before approving an invoice for funding to minimise the risk of non-payment.
You can also use Bad Debt Protection to safeguard your business from the risks of customer non-payment.
Is Invoice Finance Suitable for a Small Business?
A short trading history or low credit rating can often mean that traditional business funding sources are out of reach for many small businesses and start ups.
Invoice finance is a much more accessible source of funding that is well suited to smaller businesses. The finance company will primarily look at your customer’s credit rating and ability to pay. If you’re a small business supplying a larger business on net terms, invoice finance can be a great way to plug cash flow gaps between payments and keep your business growing.
Is Invoice Finance Right for Your Business?
If your business offers net terms to your customers, this funding type may be right for you. It’s a fast source of financing that can help you manage your working capital during cash flow gaps and fund expansion during busy periods of growth.
By using your improved cash flow to reinvest and generate more profit than the funding facility’s cost, an invoice finance solution can fuel sustainable growth and help you to become more profitable.
ScotPac Invoice Finance
ScotPac Invoice Finance helps you turn your outstanding invoices into immediate funding. You can arrange a facility within 24 hours, with our dedicated team of relationship managers and decision-makers working with you to put the funding you need in place.
We’re growth enablers and put the needs of our clients at the centre of what we do. On average, our clients grow 3x faster than the Australian business.
If you want to find out more about a confidential invoice discounting arrangement or an end-to-end factoring service, speak to one of our friendly invoice finance advisors today.
Is Invoice Factoring Worth It?
If your business needs a quick source of capital to overcome a cash flow gap or struggles with slow-paying customers, invoice factoring can be an effective solution.
Like all forms of financing, there are benefits and drawbacks to factoring that make this type of funding more suited to some businesses than others.
Let’s take a closer look at how factoring works and review the pros and cons so you can determine whether this type of funding is right for your business.
What is Invoice Factoring?
Instead of loading long-term debt onto your business like a traditional loan, invoice factoring allows you to quickly access the money owed to your business by your customers. You can turn your outstanding invoices into a source of fast funding.
In an invoice factoring agreement, a business can sell its accounts receivable at a discounted rate to a third party known as a factor. Rather than waiting 30+ days for your customers to pay, you submit your outstanding invoices to the factoring company and receive up to 95% of the invoice value upfront.
You can use the cash payment immediately as your daily working capital. A factoring agreement can be beneficial if you need a prompt cash injection rather than waiting out the invoicing terms to receive payment.
The factoring company will collect payment from your customer when the invoice is due and transfer the remaining balance of the invoice less fees.
The Pros and Cons of Invoice Factoring
It’s important to consider both the positives and negatives before agreeing to an invoice factoring arrangement. This type of funding facility offers several benefits, but also some drawbacks that make it unsuitable for some businesses.
Pro – Quick Cash Flow Boost
Invoice factoring gives you immediate access to money owed to your business. It means that you can keep your business running, pay suppliers, and take on new orders with sufficient cash flow.
While a traditional bank loan can take up to several months to be approved and is subject to strict lending criteria, invoice factoring can provide a cash advance in as little as 24 hours.
Pro – Predictable Working Capital
You can take on new clients and make plans to expand, knowing that you have enough working capital to support your business decisions. An invoice factoring facility means that as long as you keep making sales and raising invoices, cash flow gaps will never be a problem.
Pro – High Approval Rate
Unlike a traditional business loan, the length of your trading history and credit rating does not play a significant role in the approval process. The factoring company is more concerned with your customers’ payment history and creditworthiness. If you struggle with a low credit score or have previously been rejected for a business loan, you may still qualify for invoice factoring.
Pro – Save Time and Money Spent Chasing Payment
Chasing outstanding invoices is a time-consuming and expensive task. Australian SMEs spend an average of 12 business days a year chasing payment from customers.
By outsourcing your account management and collections, you will have more time to focus on increasing sales and growing your business.
Pro – No Property Security Required
Your outstanding invoices act as collateral in an invoice factoring arrangement. There’s no need to use your family home or property as security like a traditional business loan or credit card.
Con – Cost
You will need to consider if the fees associated with factoring work for your business. If you can generate more revenue and profit with a faster cash turnaround, invoice factoring can speed up your business’s growth.
If your company trades on slim profit margins, it might make more sense to wait until you receive the full invoice amount.
Con – Limited to the Value of Your Invoices
A debt factoring facility is limited to the value of your outstanding invoices. While this is generally enough to support working capital, you may need a different business finance solution if you need funding for a large business purchase.
Con – Dependent on Creditworthiness of Your Customers
The invoice factoring company will consider your customer’s payment history to calculate the risk of purchasing your invoices. If you have a customer with a poor credit rating and history of late payments, it’s unlikely that the finance company will accept those sales invoices for factoring.
Con – Your Customers Will Be Aware of the Factoring Arrangement
With invoice factoring, your customers will generally be aware of your relationship with the finance company. If you prefer to keeping your funding arrangement confidential, an invoice discounting facility may be more appropriate.
What is the Difference between Invoice Discounting and Factoring?
Invoice finance is an umbrella term that describes the various ways a business can secure funding against unpaid invoices. The most common types of invoice finance are factoring and discounting.
These funding solutions allow a business to use it’s outstanding invoices as collateral to secure a fast cash injection.
With invoice discounting, you bill your customer as usual, submit the invoice to the finance company, and receive an advance of up to 85% of the invoice value upfront. When the customer pays the invoice, you receive the remaining balance less fees.
There are some significant differences between discounting and factoring.
In an invoice discounting arrangement, you remain responsible for the collection of the outstanding invoice. If you have a dedicated accounts and collections department, this can be beneficial. Due to the collections and account management services associated with factoring, it usually costs more than invoice discounting.
Another key difference is confidentiality. An invoice discounting facility is usually a confidential funding arrangement between you and the finance company. Your customers will be unaware that you are using your sales invoices to access funding.
Is Invoice Factoring Right for Your Business?
According to the Australian Securities & Investments Commission’s latest report, 51% of insolvencies are due to inadequate cash flow. If your business needs funding, invoice factoring can be a fast way to ease cash flow gaps and help you better manage your working capital.
Below are some of the top reasons why businesses use factoring services:
- Business is seasonal, and there are peaks and troughs in your invoicing cycles that result in cash flow variations.
- You are a rapidly growing company that needs working capital to purchase supplies and inventory.
- You issue numerous invoices each month and offer your customers payment terms.
- You are building your credit rating.
- You need financing but don’t have high-value assets to use as collateral for a loan.
Ultimately, factoring rates and fees will result in having less money paid into your business for your existing invoices. But if speeding up cash cycles will enable you to fund orders and take on new customers, invoice factoring can increase your revenue and improve profitability.
If you want to see how invoice finance can help a real business grow, check out ourcase studyon Victoria base confectionery company Bramble & Hedge.
Invoice factoring is a lasting solution that ensures that enough cash is paid into the business to sustain growth. If you need a large amount of capital for a significant business purchase, you may find asset finance is more suited to your needs.
ScotPac Debt Factoring
>We believe every business deserves the chance to grow. Our team of business funding experts and local decision-makers strive to help our customers get the capital they need, whether through invoice factoring, discounting, or another business finance solution.
>If you need some help deciding whether invoice factoring is right for you, speak to one of our friendly financial advisors today, and we’ll guide you through your options so you can make the best choice for your business.
Types of Business Finance
Cash flow and profit are not the same. Many successful businesses need funding to support working capital and fuel growth plans.
Unexpected costs, slow-paying clients, and many other factors can put a strain on your finances. Almost a third of Australian businesses say their available cash would allow them to survive less than three months. When cash flow becomes stretched, you need to explore your funding options.
But getting business finance is a significant challenge, with traditional lenders increasingly risk-averse. However, there are several alternative financing solutions to help business owners manage their cash flow and get the capital they need.
Here’s a rundown of the potential sources of funding you can explore when looking for financing.
Debt Finance or Equity Finance
There are two main types of funding that a business can use to secure financing:
The business receives funding from a third-party source and repays the money borrowed plus interest and fees.
A third party provides funding in exchange for part ownership or shares in the business.
Within these categories, there is a range of financing solutions designed for different business needs.
Types of Debt Finance
Debt finance is the most common type of funding and encompasses traditional and alternative funding sources. You don’t need to offer any equity in exchange for funding, but you will typically need to repay the sum borrowed plus interest.
A bank loan can provide a large lump sum to cover large purchases or fund the expansion of a business with a strong credit rating. The principal plus interest repaid over a set period of regular repayments.
Loans are a very rigid type of funding that is out of reach for many businesses. The application process can last several months, and strict lending criteria mean you will need to submit a detailed business plan, provide collateral, and have a strong financial track record.
Business Credit Cards
Business credit cards can support working capital and cover everyday business expenses. More accessible than a business loan, but credit card interest rates and fees can be expensive and quickly mount up if you don’t clear your balance each month.
Credit cards are typically used to cover small purchases. If you require more substantial funding to pay suppliers, cover overheads, or fund expansion, there are more affordable and better-suited alternatives.
Invoice Finance is a flexible funding solution that allows a business to turn its outstanding sales invoices into a source of readily available funding. Instead of waiting 30+ days for your customers to pay, you can use invoice finance to receive up to 95% of the invoice value as a cash advance. When your customer pays the invoice, you receive the remaining balance less fees.
Unlike a bank loan, you don’t need to use your home as collateral. There are two main types of invoice finance: factoring and discounting. You can read more about the difference between these solutions in our blog post.
This type of funding is available to businesses that sell to other businesses and raise sales invoices for their goods and services.
Asset Finance is a type of finance that helps a business to fund the purchase of high-value assets, including new and second-hand machinery, equipment, and vehicles.
It can also be used to help a business release the capital tied up in the high-value assets they already own.
This form of financing typically involves hire purchasing, finance leasing, and operating leasing. Unlike a traditional loan, the asset the business wants to purchase acts as collateral for funding, so there is no need for property security. The business makes regular repayments over a set period to pay back the principal and interest.
Trade Finance is a funding solution that helps importers and exporters to cover cash flow gaps and mitigate the risks involved with trading internationally. It can also be used for domestic trade, along with other solutions like supply chain finance.
By using a third-party to finance a transaction, the supplier can be sure they will be paid once the goods are shipped, and the buyer has some protections to ensure they will receive the goods.
Buyers can use trade finance to cover cash flow gaps waiting for shipments and use the funding to negotiate early payment and bulk buying discounts. Suppliers can release the money tied up in goods sold and speed up cash cycles.
For a more detailed look at this type of funding, read our blog post How Trade Finance Works.
Line of Credit
A line of credit allows a business to pay for everyday expenses, cover emergency costs, and fund expansion. It works in a similar way to a business credit card or overdraft.
You can draw down on the available credit whenever you need. As you take out funds and make repayments, the available credit limit increases and decreases accordingly.
This type of funding is often used alongside an invoice finance facility. You draw funds as and when you need them, and make repayments when you raise and submit a new invoice to the finance company.
Merchant Cash Advance
A merchant cash advance is a financing solution for businesses that process significant volumes of customer card payments. The amount you can borrow is determined by the value of the card payments you process at your business.
Once funding is in place, every time you process a card payment, a percentage of the payment value is automatically used to repay the principal and interest on the sum owed. The amount you repay in a month depends on the value of the card payments you process.
This type of funding can help businesses with season sales cycles, but there are many pros and cons to a merchant cash advance and interest rates are usually higher than other types of financing.
Types of Equity finance
Equity finance covers a smaller range of funding solutions. With equity finance, you will need to give up a stake in your business in exchange for funding. There are no repayments or interest, but you will need to share some control and profits with your investors.
Crowdfunding has become a popular way for startups and innovative companies to seek funding. You don’t need to have a strong credit rating or collateral to secure financing, but you will need to create a strong promotional campaign to attract the attention of potential investors.
This is a long-term funding solution. You’ll need to have a compelling pitch and be willing to dedicate lots of time and effort to promote your business. Getting crowdfunding is likely to be a long process, and there’s no guarantee you will raise the funds you need.
Venture capital is a possible funding source for businesses with high growth potential. You’ll need a scalable business plan and have achieved some success already to appeal to investors. Before a venture capitalist is willing to invest, they’ll want to audit your business so you’ll need to keep your accounts and business plan up to date.
This type of funding is out of reach for most businesses, with venture capitalists looking to invest significant sums of money in companies with a high chance of producing a large return.
This type of equity finance has some similarities to venture capital. Essentially, you offer shares or part-ownership in your business in exchange for funding. You’ll need a detailed business plan, up to date accounts, and growth potential to attract potential investors.
Angel investors typically work alone and use their own money to fund investments. Alongside funding, an angel investor can offer experience, connections, and advice to help you grow your business.
Finding an angel investor can be challenging. You’ll need to attend events, explore mutual connections, and expand your network to increase the chances of finding an investor.
Family and Friends
Mixing business with personal life can create problems, but friends and family may be able to offer financial support to help you grow your business. Many of the most successful companies, including Amazon, were started on the back of a loan from a family member.
If you do seek funding from friends and family, be clear about the terms of the financing. Put together a basic contract outlining the share of equity or repayment terms.
Determining the Type of Business Financing You Need
When you’re determining which type of business finance is right for your business, ask yourself the following questions:
- How much capital do I need?
- How quickly do I need funding?
- What types of funding will I qualify for?
- How much can I afford to repay per month?
If you require regular funding to cover cash flow gaps as your business grows, a flexible invoice finance facility could be a good solution. For more substantial business expenses, a bank loan or asset finance solution could provide the capital you need.
We offer a range of flexible finance solutions to help businesses access the capital they need to grow. Speak to one of our financial advisors today to explore your funding options.
Invoice Discounting vs Factoring?
Australian SMEs have always found it challenging to qualify for funding from traditional lenders. This lack of access to finance is even more apparent as late payment times have accelerated nationally. In 2020, businesses were made to wait 2.9x longer to receive payment than they did in 2019.
Invoice finance is a way for businesses to unlock the capital tied up in their outstanding invoices. You can get paid immediately, rather than waiting for 30+ days for your customers to pay.
There are two main types of invoice finance: factoring and discounting. While both of these solutions allow you to turn your outstanding invoices into an immediate cash flow boost, there are some key differences.
What is Invoice Factoring?
Invoice factoring is a funding solution where you effectively sell your accounts receivable to the finance company. The terms of a factoring agreement can vary, but you can expect to receive up to 95% of the value of your unpaid invoice upfront as a cash advance.
Once you have submitted the invoice for factoring, the finance company takes on the responsibility of collecting payment from your customer. When your customer pays the invoice, you receive the remaining balance of the invoice less fees.
Because the finance company collects the invoice payment, your customer will usually be aware of the factoring agreement.
What is Invoice Discounting?
Invoice discounting works similarly to factoring. Once you submit an invoice to the finance company, they will provide up to 85% of the invoice value upfront as a cash advance. When your customer pays the invoice, you receive the remaining balance less fees.
There are some key differences to factoring, including the responsibility for collecting payment from your customer. With invoice discounting, you retain the responsibility for collecting payment of the invoice.
This usually means your relationship with the finance company is confidential, and your customers will be unaware that you have used the invoice to access funding.
For a more detailed look at how these two financing solutions work, read our guide How Does Debtor Finance Work.
The Differences Between Discounting and Factoring
Both types of invoice finance allow you to turn your accounts receivable into a source of readily available funding. But there are several differences between these solutions.
With invoice factoring, you are selling your accounts receivable to the finance company. You don’t need to spend time chasing payments, but the invoice finance company will deal directly with your customers.
With a discounting arrangement, you essentially use your unpaid sales invoices as collateral to secure a line of credit. The funding relationship is confidential.
The Amount You Receive Upfront
You can expect to receive up to 95% of the invoice value upfront when you factor an invoice, compared to 85% when you discount an invoice.
While this is only the upfront payment and you will receive the remaining balance less fees once your customer settles the invoice, but it’s something to keep in mind if you urgently need to raise capital.
Generally, factoring is more expensive than discounting. This is because of the additional accounts management and collections services that are associated with factoring. You are outsourcing these tasks to the finance company.
Option of Non-Recourse Factoring
It’s possible to secure non-recourse factoring when you enter into an invoice finance agreement. This form of factoring transfers the liability for the debt to the finance company. If your customer doesn’t pay the outstanding invoice, you won’t be required to pay back the sum owed.
Non-recourse factoring is much harder to qualify for and more expensive than recourse factoring. However, there is no option for non-recourse invoice discounting.
Invoice factoring is much more accessible to small businesses and those that lack dedicated accounts and collections departments.
To qualify for invoice discounting, you will typically need to demonstrate a history of collecting invoices on time and have a dedicated internal accounts and collections department.
Invoice Factoring vs Discounting
Both types of invoice finance can help you to improve cash flow and better manage your working capital. You can speed up cash cycles and reinvest in your business faster than if you have to wait for customers to pay.
But factoring and discounting are different solutions, each with pros and cons you should be aware of before deciding which is right for your business.
The Pros and Cons of Factoring
Pro – Time Management
With the finance company handling credit control and chasing payments, you are free to spend your time on more dollar productive tasks. Australian businesses spend as much as 8 hours per week chasing payments, totalling 52 working days per year.
Pro – Credit Checks
If you choose an end-to-end factoring solution that covers your complete accounts receivables, you’ll receive protection against overextending with customers that may be unable to pay.
The finance company will perform credit checks on your clients before factoring an invoice, so you’re more likely to do business with customers that will pay on time.
Con – Your Customer Will Be Aware of the Financing
Some business owners prefer to keep their financing arrangements confidential. With factoring, your customers will be dealing with the finance company’s collections department.
Con – More Expensive
The additional account management and collections services associated with factoring make it a more expensive solution than discounting.
The Pros and Cons of Invoice Discounting
Pro – Confidential
Invoice discounting can be a confidential funding arrangement. Your customer will deal with your collections department and be unaware of the funding relationship.
Pro – Cheaper
Discounting is generally cheaper than invoice factoring.
Pro – Build Closer Relationships With Customers
With your business responsible for collections and accounts, you may find it easier to build relationships with your customers. Introducing a third-party can complicate your business relationships, especially if you don’t choose a reputable finance company.
Con – Smaller Upfront Cash Advance
You will typically receive up to 85% of your invoice’s value upfront. This is lower than the 95% you can receive as an advance in a factoring arrangement.
Con – Harder to Access
You will need dedicated in-house collections and accounts departments with a strong track record of collecting customer payments on time to qualify for invoice discounting.
Which Industries Can Use Invoice Factoring and Discounting?
Invoice finance is suitable for any business that sells to other businesses and offers net payment terms. If your company struggles with working capital due to the gap between raising an invoice and receiving payment, it will be a good candidate for invoice finance.
The following industries can benefit most from an invoice finance facility:
- Wholesale trade
- Recruitment and staffing
Read our client story to see how invoice finance powered national and international expansion for Tasmanian spirits producer Strait Brands.
Choosing the Right Type of Invoice Finance for Your Business
The right solution for your business will depend on your unique circumstances.
In general, factoring is more accessible and better suited to small businesses that need to support working capital as they grow. Discounting is typically used by larger, more established companies with an in-house collections team.
One of the key advantages of invoice finance is its flexibility. From selective invoice finance to cover unexpected expenses to a revolving line of credit secured against your accounts receivable, we can tailor multiple funding solutions to your business’s needs.
If you need help determining which financing solution is right for you, speak to one of our financial advisors. We’ll guide you through your options and help you get the funding solution that’s best suited to your business.
What is Asset Financing?
Asset financing is a funding solution for businesses that have an opportunity to grow but don’t have enough liquidity to capitalise. It can also help businesses that would prefer to spread major purchase costs over a more extended period.
Rather than tying up large amounts of capital and disrupting cash flow, a business can use asset financing to secure the use of the equipment, machinery, and other business assets.
Asset financing can also refer to the use of existing business assets as collateral to secure access to a line of credit. This type of funding facility enables businesses to unlock the capital tied up in their accounts receivables and other assets, so it can be put to use in other areas of the business.
Why Businesses Use Asset Financing
There are two main reasons why a business can benefit from an asset financing solution.
Securing the Use of an Asset
The purchase of a high-cost business asset can put considerable strain on working capital. Asset financing helps companies to secure access to the equipment, machinery, vehicles, and other assets they need without the sizeable cost of purchasing the asset upfront. You can maintain liquidity and invest the funds in other areas of your business that will help the company to grow faster.
Asset finance can also help businesses with capital tied up in assets to secure a line of credit. High-value assets can be used as collateral to secure funding. This can be an effective finance solution for businesses that struggle to qualify for a loan from a traditional lender, or that need to secure financing quickly to capitalise on an opportunity.
Asset Financing Example
Here’s an example of asset financing in action to illustrate how the process works and how your business could benefit.
A growing mid-sized construction company requires several new pieces of plant machinery to increase its workload capacity. There is a significant increase in demand, and the business will struggle to meet deadlines and take on new customers without expanding capacity.
The business doesn’t have enough liquidity to pay for the equipment upfront, so they enter into an agreement with an asset financing company to lease the plant machinery for the next 50 months.
With the use of the new machinery, the construction company can meet its current deadlines, take on more contracts, and increase revenue.
Once the contract has finished, the construction company can return the assets to the financing company or purchase the machinery for a nominal fee.
How Asset Financing Helps a Business to Grow
Asset financing provides business owners with a way to support growth and expand without stretching working capital and experiencing cash flow gaps. It’s a way to spread the cost of new assets and avoid tying up money that can be better used in other areas of the business. With access to new equipment and machinery, the company can become more productive and take on new customers.
According to the Australian Bureau of Statistics, lack of access to funding is one of the largest obstacles to general business activities and performance for small to medium-sized businesses.
For businesses looking to release capital tied up in assets they already own, asset financing can be a flexible and fast way to boost cash flow. By using assets as collateral to access a line of credit, you can negotiate early payment/bulk buying discounts with suppliers, and allocate your additional resources to the areas that will fuel the most growth.
The Benefits of Asset Financing
The key benefit of asset financing is the ability to secure access to equipment and machinery that help your business to grow. With these new assets, your business can generate more revenue than the cost of the monthly repayments and become more profitable. Asset financing is a highly flexible funding solution that offers several benefits, including:
No Upfront Costs
1. You can fund up to 100% of the purchase cost of an asset with no initial cost to the business. If you need to move quickly on an opportunity, asset financing can help you secure access to the equipment you need without impacting your working capital.
2. No Risk of Deprecation
When you purchase a high-value asset outright, the risk of depreciation falls onto your business. With asset financing, the risk of depreciation is usually the responsibility of the finance company. Making regular repayments can also be a more tax-efficient way to fund the purchase of an asset as the repayments are considered tax-deductible expenses.
3. Increased Cash Flow
With no upfront payment, asset financing allows you to spread the cost of an asset over a more extended period. This allows for better working capital management and the ability to invest in the areas of the business that will generate more revenue and growth.
4.Lower Maintenance Costs
Depending on the terms of the asset financing arrangement, the finance company may be responsible for the maintenance and repair of the asset. This means you can avoid any significant unexpected expenses, and the asset is kept in a condition where it can continue to work for your business.
5. No Need to Use Your Home as Security
Because the value of the asset is used as security for the funding facility, you typically don’t need to use your family home as security. Traditional lenders have strict lending criteria that usually requires some form of collateral. With asset financing, you can access the equipment you need without any additional collateral.
Who is Asset Financing For?
Asset financing is a flexible funding solution for businesses of all sizes. The funding facility can be accessed by registered companies, contractors, and sole traders.
Many businesses are using asset financing to take advantage of the extension of the instant asset write-off scheme. For more information on how the scheme works, read our guide here.
How Long Can an Asset Be Financed Over?
Asset financing facilities can range from 24 to 60 months. The length of the facility depends on the “usable” life of the asset, and how quickly you want to pay back the sum owed. Some businesses prefer a short-term credit arrangement, while others see a predictable long-term repayment plan as more beneficial.
Types of Asset Financing
Asset financing covers a range of funding solutions to help businesses access the equipment and funding they need.
- Hire Purchase
In a hire purchase arrangement, the finance company will purchase the asset for the business to use. The business will make payments to the finance company over a set period of months. Once the final monthly payment is made, the business will be given the option of purchasing the asset for a nominal fee.
- Equipment Finance
Equipment finance is a more flexible funding arrangement. The business will agree to make payments for the use of the equipment over a set period. Once the leasing period ends, the business will have the option of purchasing the equipment, extending the lease, or returning the asset to the finance company.
- Operating Lease
An operating lease is a short-term flexible funding facility that works in a similar way to an equipment lease. Because the length of the facility is shorter, the overall costs are lower, but the monthly payments are higher. This type of funding is more expensive in the long-term but can be an effective solution for a business in need of equipment of machinery for a time-limited period.
- Finance Lease
A finance lease differs from the other types of asset financing as it transfers the obligations of ownership onto the business rather than the financing company. For the duration of the facility, the business is responsible for the maintenance and repair of the equipment.
- Asset-Based Finance
While the above types of financing help businesses to access the assets they need, an asset refinancing facility helps you to release capital tied up in the assets you already own. By using your equipment, machinery, and property as collateral, you can access a line of credit to increase working capital and raise funds. You can also use your accounts receivables to turn your outstanding invoices into an immediate cash injection. This type of facility is called Invoice finance.
Asset Financing with ScotPac
Asset finance is an accessible working capital solution for businesses that need to fund the purchase of an asset or release the capital they have tied up in existing assets.
Finding the money for a significant purchase upfront can put pressure on working capital. Asset financing allows you to spread the cost of an asset over a more extended period, and make better use of your resources.
We offer a range of flexible asset finance solutions to help businesses access the funding and equipment they need to grow. If you need some help funding a business purchase or want to know more about unlocking the capital tied up in your existing assets, call us today to see how we can help.
Why is Supply Chain Finance Important?
Cash flow is a pressing concern for the majority of business owners. According to a recent survey, 63% of business owners are regularly stressed or suffer from anxiety due to cash flow concerns. We discovered similar conclusions in our SME Growth Index research.
Lack of working capital can also put a strain on trade relationships.
In a typical trade transaction, buyers want extended payment terms, and suppliers want to be paid faster. Capital is tied up in the supply chain until invoices are settled.
The two contrasting needs can result in the supply chain slowing down and a reduction in profit for both parties. The COVID-19 pandemic has exacerbated cash flow shortages and placed further pressure on trade relationships, especially for SMEs. As explained in a recent study published in the Havard Business Review:
“a less visible crisis deep within supply chains that could add to the woes of the global economy – SMEs tend to be the first to feel the effects of financial crises. But their current plight is exacerbated by punitive payment terms that large companies began introducing in the aftermath of the 2008 financial meltdown.”
– Federico Caniato, Antonella Moretto, and James B. Rice, Jr.
Supply chain finance is a financing solution that helps to stabilise trade relationships and meet the contrasting needs of both parties. This is achieved by adding a third-party to trade relationships to help unlock the capital tied up in the supply chain.
What is Supply Chain Finance?
Supply chain finance is a business funding solution designed to help businesses unlock the capital tied up in supply chains. According to McKinsey & Company, the use of supply chain finance could stimulate commerce worldwide by releasing an additional $2 trillion in working capital tied up in supply chains.
Both buyers and suppliers can benefit from the increased liquidity.
The supply chain finance company advances the money owed to the supplier when an invoice is raised so they can get paid faster. The buyer pays the invoice at a later date so that they can take advantage of extended payment terms.
In a typical supply chain finance arrangement, the buyer will have a stronger credit rating than the supplier. This enables the smaller supplier to access finance at more affordable rates than they would be able to negotiate on their own.
How Does Supply Chain Finance Work?
Supply chain finance works by adding a third-party to the transaction between buyers and suppliers. Here’s a simple outline of how the supply chain finance process works.
- The supplier raises an invoice to the buyer as they usually would after concluding a commercial transaction.
- The buyer approves the invoice for payment and submits it to the supply chain finance company.
- The supplier is notified about the receivable by the supply chain finance company.
- The supplier can immediately fund the invoice and receive an advance of funds or wait for the invoice to be paid on net terms.
- When the invoice is due, the buyer pays the supply chain finance company the full invoice amount. The supplier receives any remaining balance from the supply chain finance company.
Buyers can access extended payment terms without placing financial pressures onto their suppliers. Suppliers can access capital at much lower rates and increase cash flow.
Supply chain finance is also known as reverse factoring. In contrast to a standard invoice factoring facility, the financing is based on the buyer’s financial profile rather than the supplier. This means the supplier can usually access more affordable finance rates than they would factoring their invoices directly.
This type of facility is also typically considered an “off-balance sheet” source of funding. A supply chain funding facility generally won’t impact your ability to qualify for other sources of business finance and can sit alongside your existing loans and funding streams.
Unlocking Working Capital with Supply Chain Finance
Traditional lenders and banks are increasingly risk-averse, making it harder for SMEs to access funding. At the same time, net terms and late payments are a significant concern for Australian businesses. According to the Australian Small Business and Family Enterprise Ombudsman, 53% of invoices are paid late, with 23 days overdue the average for late payments.
Supply chain finance stabilises the supply chain by allowing suppliers to use their outstanding invoices to get paid faster and offering buyers increased payment terms. With capital released from the supply chain, sales cycles can be accelerated, and business goals can be met more quickly.
Businesses from a wide range of sectors can benefit from supply chain finance. According to a PwC study, consumer goods, manufacturing, and transportation are the sectors with the highest levels of supply chain finance adoption:
Supply chain finance takes a holistic view of the supply chain. By adding a third-party to the transaction, the contrasting needs of suppliers and buyers can be met, working capital is unlocked, and growth opportunities can be realised.
The Benefits of Supply Chain Finance
Supply chain finance empowers companies with the liquidity they need to grow. Releasing capital tied up in the supply chain can be transformative for cash-hungry businesses. Long term relationships can be fostered, and the risk of disruption in the supply chain can be mitigated.
Benefits of Supply Chain Finance for Buyers:
- Boost cash flow through extended payment terms
- Increase margins by negotiating bulk/buying early payment discounts with suppliers
- Build stronger relationships with suppliers
- Reduce the risk of supply chain disruption
Benefits of Supply Chain Finance for Suppliers:
- Increase working capital
- Access more favourable finance rates
- Speed up sales cycles
- Offer extended payment terms to customers
Suppliers can facilitate new orders and fund the growth of the business. Buyers can take advantage of extended payment terms and increase the reliability of the supply chain. Around a third of buyers have suffered a shortage of critical supplies due to a supplier incapacity in the last two years.
Both parties benefit from this collaborative approach to meet working capital needs.
Supply Chain Finance with ScotPac
Every trade relationship is different, and there is no one-size-fits-all solution when it comes to supply chain finance. You need a funding facility that works for your business and helps you to achieve your unique business goals.
Here at ScotPac, we offer a range of flexible business finance solutions to help unlock the hidden value in your supply chain and assets. We have a team of supply chain finance experts that can help you access the funding you need to overcome cash flow gaps and realise the potential for growth and increased profitability.
Fill in the form below or give us a call to speak to one of our business finance advisors and see how we can structure a funding solution to help your business.
What Is Trade Finance?
Trade finance makes it easier for businesses to buy and sell goods, bridge cash flow gaps, and capitalise on opportunities at home and abroad.
If you’re planning to import your first consignment of goods or you’re looking to expand and take on new clients, it’s important to know how trade finance works and how it can help your business.
Trade Finance Definition
Trade finance is an umbrella term that covers a range of financial products designed to help facilitate trade between businesses. It makes it possible for companies to access funding to buy and sell goods while helping to mitigate the risks involved with trade transactions.
How Does Trade Finance Work?
The purpose of trade finance is to increase liquidity for businesses and to improve the management of risk to facilitate trade. Trade finance introduces a third-party into a transaction between a buyer and a seller.
The seller can maintain working capital through invoice financing and guarantee they will receive payment, and the buyer can fund the purchase of goods and ensure they are shipped before payment is released.
Trade finance is different from a traditional business loan or overdraft. While it can help to plug cash flow gaps, trade finance is often used by companies to manage the risks involved with domestic and international trade.
The Types of Trade Finance
There are several trade finance products and mechanisms used to fulfil the requirements of businesses and facilitate trade transactions. According to the World Trade Organization (WTO), up to 90% of world trade depends on some form of trade finance. These mechanisms can include:
Letters of Credit
A letter of credit helps to mitigate risk for both the buyer and seller. The third-party financier will guarantee payment to the seller as long as conditions of payment are met. For the buyer, it ensures that the goods are manufactured and shipped before payment is released.
Payment-in-advance is a common requirement for international transactions. The seller will typically require a down payment before manufacturing the ordered goods. ScotPac Tradeline is a trade finance solution that enables companies to access a revolving line of credit to pay international and local suppliers. You can arrange a facility that lasts up to 120 days, allowing you to purchase and sell the goods before making a repayment.
Payment Against Documents
Financiers and importers often require payment against documents to ensure the shipment of goods before payment to the supplier is released. Suppliers are usually required to submit a bill of lading to the third-party financier before the payment is transferred. Once the documents are submitted, the payment to the supplier is released.
Export finance is specifically designed to help exporters maintain cash flow and increase the speed of sales cycles. You can use your accounts receivables as collateral to access a line of credit. With access to funding, you can produce or manufacture goods for sale and take on new orders rather than waiting for overseas customer payments to clear.
Import finance is a trade finance solution for businesses that purchase finished goods from overseas or domestic suppliers. The funding is linked to an invoice finance facility to provide a line of credit of up to 180 days. You can fund the purchase of goods and repay the amount owed using outstanding customer invoices.
There are a number of trade finance solutions to help facilitate trade transactions and encourage commerce. For a more detailed breakdown of how these mechanisms work, take a look at our guide “How Trade Finance Works”.
Why Companies Need Trade Finance
Both buyers and sellers can benefit from trade finance.
For buyers, an investment in goods can make a significant dent in working capital. This can be a considerable problem for importers purchasing goods from overseas. Being able to access trade finance allows importers to fund the purchase of goods and generate revenue without suffering cash flow gaps while waiting for goods to arrive.
For suppliers, working with a large client or offering extended payment terms can result in a shortage of working capital. Trade finance enables companies to release the capital tied up in the manufacturing and shipment of goods.
A lack of cash flow is not the only reason companies need trade finance. Many large businesses with sufficient liquidity seek trade finance to mitigate the risk involved with international and domestic commerce.
How Trade Finance Can Reduce Risk
Trade finance helps to mitigate risk by accommodating the conflicting needs of the buyer and seller.
The seller would prefer to receive payment upfront to avoid the risk that a buyer will be unable to pay for goods once they have been shipped.
The buyer would prefer extended payment terms to ensure the goods are shipped and to avoid the risk of paying for goods that are not received.
A trade finance solution can be used to reduce the risk for both parties. For example, a letter of credit can be used to ensure that payment is only released once the supplier has presented the bill of lading to the financier. The letter of credit offers the seller a guarantee that the goods will be paid for once they are shipped.
Trade finance covers a range of financial solutions that can be tailored to the needs of importers and exporters. Multiple financial products can be used together to facilitate trade and ensure a smooth transaction.
The Benefits of Trade Finance
Aside from risk mitigation, trade finance offers many benefits for businesses looking to purchase and sell goods in Australia and around the world.
A funding facility helps to increase liquidity and avoid any cash flow gaps. You can pay your overheads and be confident that you have the financial backing to take on new orders. You may be able to offer extended payment terms to your customers, or secure bulk buying/early payment discounts from your suppliers to increase your margins.
Trade finance empowers SMEs with the capital they need to increase the turnover of goods, secure deals with larger customers, and scale revenues to increase profitability.
To see how trade finance can benefit your business, take a look at our case study showing how the Sydney-based import business Ayonz has used trade finance to fuel growth through difficult economic times during the COVID-19 pandemic.
Trade Finance with ScotPac
Trade finance is vital for business growth. But access to funding is unfortunately skewed towards big companies and corporations. In Asia and the Pacific, 45% of SME trade finance proposals are rejected. This is in contrast to the 83% of trade finance proposals from corporations that are accepted.
Here at ScotPac, we believe every business deserves the opportunity to grow, no matter how big or small. We offer a range of flexible trade finance solutions to help businesses access the funding they need to take on new orders.
You can set up a revolving line of credit to help you compete in global markets and closer to home. We have a team of trade experts to help you negotiate and secure better terms, and we can facilitate letters of credit, documents against payment, and telegraphic transfers.
Speak to one of trade finance advisors today, and we’ll help you put together a trade finance package that meets the needs of your business.
How Does Debtor Finance Work
Positive cash flow is a catalyst for business growth. But making more sales can sometimes result in a shortage of working capital. If you offer extended payment terms to your customers, you may experience cash flow gaps waiting for invoices to clear.
In our April 2020 SME Growth Index, we discovered that it takes an average of 56 days for Australian SMEs to get paid. At any one time, SMEs have around a third of their revenue tied up in unpaid invoices.
Debtor finance is a way to release the capital tied up in outstanding invoices. It enables you to use your accounts receivable to access fast funding and maintain cash flow.
What Is Debtor Finance?
When a business raises an invoice for goods or services, they will typically offer payment terms of 30 to 90 days. In general, the larger the invoice value, the longer the payment terms.
Debtor finance is a business funding solution that allows you to receive an advance on your unpaid invoices. This advance can be used to pay suppliers, stock inventory for peak sales seasons, and take advantage of opportunities that require investment.
Growing business and those with extended cash cycles can benefit most from this type of business finance. Instead of having to wait for your customers to pay, you can release the capital tied up in your sales invoices and reinvest in your business.
In simple terms, debtor finance can help you access the money you have earned much faster.
Compared to a business loan or overdraft, this type of funding facility is much more flexible. Traditional business finance is usually limited to the value of your home or a high-value asset used as collateral.
With debtor finance, funding limits are set by the number and value of the invoices you raise. The more sales you make, the more credit you can access.
How Does Debtor Finance Work?
Debtor finance works by using your unpaid sales invoices as collateral to access immediate funding.
You send the invoice to the finance company, and they will provide an advance of up to 95% of the invoice value. When the customer pays the invoice, you receive the remaining balance of the invoice less fees.
There are two main types of debtor finance:
Both types of finance allow you to raise capital based on the value of your outstanding invoices, but they do have different features and advantages.
How Does Debt Factoring Work?
Debt factoring is more suitable for small businesses looking to overcome cash flow gaps using their accounts receivable.
The most significant difference between factoring and discounting is the responsibility for collecting on the invoice. With invoice factoring, the finance company will handle account management and collections.
You can access up to 95% of the invoice value within 24 hours.
Here’s how debt factoring works in 5 simple steps:
Step 1: Invoice your customer as normal
Step 2: Send the invoice to the factoring company
Step 3: Receive an advance of up to 95% of the invoice value
Step 4: Your customer pays the factoring company when the invoice is due
Step 5: The remaining invoice balance is released to your account minus any fees
Invoice factoring payments are typically made in two instalments. The first is made when you submit the invoice, and the second once the customer has paid the invoice.
For more information on debt factoring, take a look at our complete guide to accounts receivable factoring.
How Does Invoice Discounting Work?
Invoice discounting is generally used by larger companies with a dedicated accounts and collections department.
You can access up to 85% of the invoice value upfront, with the remaining balanced released when the customer completes payment.
Unlike debt factoring, you are responsible for collecting payment of the invoice.
Here’s how invoice discounting works in 5 simple steps:
Step 1: Invoice your customer as normal
Step 2: Submit the invoice to the finance company
Step 3: Receive an advance of up to 85% of the invoice value
Step 4: Collect payment from your customer
Step 5: Repay the finance company the amount advanced plus fees
Both invoice discounting and debt factoring advances can be funded as a lump sum or as a revolving line of credit. This can be beneficial for businesses that need regular funding to fuel their growth plans. The line of credit increases as you raise more invoices and decreases as your customers make payments.
The fees involved with factoring and discounting depend on the value of your invoices, the duration of the funding facility, the credit scores of your customers, and the type of debt finance.
In general, debt factoring cost more than discounting because of the collections and account management services included.
Recourse Or Non-Recourse Debtor Finance
The type of debtor finance arrangement you agree with the finance company impacts your liability for the debt, and the amount you will pay in fees.
Debtor finance solutions fall into two categories:
Recourse debtor finance means that you will retain responsibility for the debt if your customer fails to pay the invoice. In contrast, non-recourse funding arrangements place the risk onto the finance company. If your customer fails to pay, you are not liable for the money owed.
Because non-recourse debtor funding places all of the risk onto the finance company, you can expect to pay more in fees.
Debtor finance can help you avoid overextending with customers that may struggle to pay for the goods and services you provide. As part of your invoice finance facility, we will check the creditworthiness of your customers before funding an invoice.
We also offer Bad Debt Protection as an additional service to protect your cash flow if a customer fails to pay.
Confidential Or Disclosed Funding Arrangements
Debtor finance solutions can be confidential or disclosed.
Most debt factoring solutions are disclosed, and your customers will be aware of your relationship with the finance company.
If you would prefer to keep your funding relationship confidential, invoice discounting arrangements can provide access to capital without disclosing the finance company’s involvement.
Who Can Benefit From Debtor Finance?
If you offer extended payment terms to your customers, your business can benefit from debtor finance. For startups and more established businesses, debtor finance can be used to pay your bills, negotiate early payment discounts with suppliers, and offer net terms to entice new customers. According to a study by CB Insights, 29% of startups fail due to a lack of sufficient cash flow.
It’s important to align any business funding with your long term goals and growth plans. If you could use the money tied up in your debtors ledger to fuel the growth of your business, debtor finance can be an effective funding solution.
For businesses that mainly deal with cash transactions, there are more suitable funding solutions. Give us a call and ask one of our financial advisors how Trade Finance or Asset Finance could help your business.
Is Debtor Finance Right for My Business?
Debtor finance is an effective way to boost working capital by releasing the money owed to your business in outstanding invoices. Whether it’s the right funding solution for you depends on your unique circumstances and the reason for the funding.
We help people to unlock the hidden value in their business. Whether through debtor finance or an alternative funding solution, we’ll help you get the financial backing your business needs to flourish.