Invoice Finance helps thousands of businesses in Australia every day. It’s an effective way to quickly release cash tied up in unpaid sales invoices and generate working capital.
Instead of waiting for your customers to pay, you can access a cash advance of up to 95% of the invoice value. When your customer pays the invoice, you get the remaining balance, less fees.
This type of funding has been around for centuries. But many business owners have misconceptions about Invoice Finance and how it works.
In this post, we’re going to look at the 10 most common Invoice Finance myths. We’ll reveal the truth behind each myth so that you can better understand how this financing works and if it is the right solution for your business.
10 Common Misconceptions of Invoice Financing
1. Invoice Financing Is for Struggling Businesses
One of the biggest myths surrounding Invoice Finance is that it is only for failing businesses. While this type of funding can help a company struggling with cash flow, it’s also a funding solution for growth.
For example, many fast-growing businesses encounter liquidity issues when cash inflows don’t keep up with outgoings. It can take 30+ days to receive payment from customers. During that time, you need to cover overheads, pay suppliers, and continue to process new orders.
Invoice Finance ensures that your cash flow always keeps up with growth. You’re not taking out a loan and tying your business down to long-term debt. Instead, you’re unlocking the value of your unpaid invoices to get paid faster for the goods and services you have already sold.
2. You Lose Control of Your Business
You are still in control of raising invoices and communicating with your customers. The only difference is that you have the option of outsourcing collections and account management to the financing company if that’s something that could benefit your business.
Invoice Finance is a flexible funding solution that can be tailored to the needs and preferences of the business owner.
Sometimes, a business without a dedicated collections department can benefit from outsourcing collections to the finance provider. This can free up time that can be better spent on other areas of your business and reduce your average debtor days.
3. Invoice Finance Is Expensive
This is one of the most common Invoice Finance myths. When you finance an invoice, the funding provider usually charges a small percentage of the total value to provide your business with an immediate cash injection.
While this does reduce your profit margin on the invoice, it also allows you to access capital and reinvest much faster than if you had to wait for your customer to pay.
According to the Government’s Payment Times Reports Register, the average payment term for small businesses is 37.27 days. With an Invoice Finance facility, you can access up to 95% of the invoice value within 24 hours of raising the invoice.
Some Invoice Finance facilities also come with account management services that can save you time and money by allowing you to focus on growth – not chasing customer payments and paperwork.
Read our explainer guide if you want to learn more about the cost of invoice financing and how the fees are calculated.
4. It’s a Funding Solution Only Suitable for Startups
Invoice financing is one of the most accessible ways for startups to get funding.
A new business is cash hungry. It needs capital to cover the cost of new inventory, payroll, marketing, equipment, and all the other overheads. You also need capital to fund new orders and take advantage of opportunities.
But startups aren’t the only organizations that have to manage these considerations.
Established businesses can experience liquidity issues due to extended payment terms and slow-paying customers. According to Xero, the total value of late payments to small businesses is estimated at $115 billion yearly.
Invoice financing can provide cash flow benefits for businesses of all sizes – not just startups.
5. It Will Damage Customer Relationships
Some small business owners are concerned that the invoice financing provider will harass their customers when chasing payment for the unpaid invoice. This is one of the invoice financing myths that most concerns SMEs and business owners.
In reality, you don’t need to involve the finance company in the customer relationship more than you require.
Here at ScotPac, we check the creditworthiness of your customer before agreeing to finance an invoice. We will only fund an invoice for a customer with a track record of paying invoices on time.
There’s also the option of confidential Invoice Discounting. You can fund an invoice but retain the responsibility for collecting customer payments. The financing company will provide funding but won’t contact your customer directly.
6. Invoice Financing Involves Too Much Paperwork
Working through a mountain of paperwork during the application process can be off-putting for many business owners. But Invoice Finance involves much less paperwork than most other types of financing.
You’ll need to provide your ATO details and a few other financial statements and documents, which you can submit online. When the facility is in place, you’ll also be able to upload invoices online.
If you use cloud accounting software, you can easily integrate Cash Connector with your existing system. You’ll be able to choose which invoices you want to fund, see information across systems, and get paid faster. Cash Connector can save you time and give you more flexibility.
You can receive funding in as little as 24 hours of submitting an invoice.
7. Invoice Financing Has Lock-in Contracts
Lock-in contracts are another common misconception about Invoice Finance. Many small business owners fear being locked into contracts that last a year or more.
But invoice financing is a flexible solution that can be tailored to your needs. For example, you can choose a come-and-go funding facility with no lock-in contract.
Unlike a business loan, there are also no lengthy repayment terms with Invoice Finance. Once your customer pays the invoice, the funding provider receives their fees and transfers the remaining balance of the invoice to your account.
8. You Need To Use Assets as Security
This is another common misconception we can add to the list of invoice financing myths debunked.
Most Invoice Finance providers do not require any form of additional collateral. Instead, the invoice itself acts as security for the funding facility.
Unlike a business loan, you don’t need to use your home or personal assets to secure funding for your business.
9. You Have To Submit Every Single Invoice for Funding
This is not true of all invoice financing arrangements.
With invoice factoring, also known as Debt Factoring, the financing company handles the management of your accounts. This type of facility comes with back-office support and usually requires that you submit your entire accounts receivables and all the invoices you raise.
However, there is also the option of Selective Invoice Finance. This facility allows you to choose which invoices you want to finance. For example, if you offer extended payment terms to some larger customers, you can submit those invoices for funding.
10. All Invoice Finance Companies Are the Same
The biggest invoice financing myth is that all funding providers are the same.
More and more SMEs are turning away from bank financing due to time-consuming processes and strict lending criteria. In our latest SME Growth Index, 66.1% of SMEs reported introducing new funding options during the past year.
The increase in demand for new funding sources means there are more invoice financing providers in Australia than ever before.
But just like in every industry, some providers are much better than others.
When looking for a provider, you should make sure you research the reputation of the company. Here at ScotPac, we’ve been a trusted partner for SMEs for over 30 years. We help our clients to unlock value and fuel growth with award-winning financing solutions. That’s why our clients grow 3x faster than the average Australian business.
ScotPac Invoice Finance
If you’re looking to boost cash flow and speed up growth with Invoice Finance, we can help. Our flexible invoice financing solutions can be tailored to the needs of your business.
You can choose from confidential Invoice Discounting or full-service Debt Factoring, with the option of long-term funding or a come-and-go facility.
We can arrange a facility and provide funding in as little as 24 hours.
Use our simple online form to start your application today, or give us a call on the number below. One of our team of business finance experts will help you find the right funding option for your business.