Managing cash flow is a challenge for every business. If extended payment terms are causing cash flow gaps, Invoice Finance could provide the cash injection your business needs. 

Unlike a business loan or overdraft, Invoice Finance raises capital from within your business. You can use your outstanding invoices to secure funding. 

Instead of waiting 30+ days to receive customer payments, you can get a cash advance of up to 95% of the invoice value within 24 hours of billing your customer. 

In this guide, we’ll review the pros and cons of invoice financing. You’ll discover the advantages of this type of finance and the reasons why it’s not suitable for every business. 

The Pros of Invoice Finance

Invoice Finance is a unique type of business funding. It offers plenty of benefits compared to other financing solutions. Let’s take a closer look at the advantages.

Improve Cash Flow

The biggest benefit of invoice financing is improved cash flow. If you sell to customers on net terms, Invoice Finance can bridge the gap between raising an invoice and being able to access funds. 

You can unlock the capital tied up in your accounts receivables to cover unexpected costs, pay suppliers, and reinvest in your business. Invoice Finance puts you in a stronger position to withstand cash flow gaps and capitalise on opportunities. 

Offer Extended Payment Terms

Invoice Finance allows you to offer extended payment terms and win new customers. In many industries, it’s not unusual for payment terms to stretch to 60+ days. You could lose out on sales if you are unable to offer these terms to customers. By financing your sales invoices, you can extend payment terms without worrying about the impact on your cash flow.

Accessible to Most Businesses

It’s typically much easier to qualify for an Invoice Finance agreement than traditional bank financing. You don’t need a perfect credit rating or long trading history to arrange an invoice financing facility. 

Small businesses, startups, and companies with ATO debt that struggle to access other funding sources may qualify for invoice financing.

Fast Access to Funding

You can arrange an Invoice Finance facility within a few days and be able to access funds within 24 hours of submitting an invoice. So if you need fast funding to cover an expense or fund an opportunity, you can quickly raise the capital you need. 

Funding Grows in Line With Your Business

Growing businesses are cash hungry. With invoice financing, you can get the funding you need to support the growth of your business. 

The amount of funding you can access is based on the value of the outstanding invoices you submit for financing. This means your credit limit always grows in line with your sales revenue. 

Ability to Outsource Collections and Account Management

Invoice Finance is a flexible funding solution that can be tailored to your business needs. For example, you can choose a full-service factoring facility that includes account management and collections. 

The average Australian small business owner spends 12 days per year chasing unpaid invoices. Outsourcing these tasks to the Invoice Finance company allows you to focus on growing your business, not chasing customer payments. 

There’s also the option of a Selective Invoice Financing facility where you decide which invoices you want to fund.

No Property Security

Unlike a traditional business loan or overdraft, most invoice financing companies do not require property security. Your outstanding invoices are the only collateral needed to access funding. 

Invoice financing can be a good option for business owners that don’t want to risk their home or assets as security for business finance.

The Cons of Invoice Financing

Invoice Finance can unlock the funds owed to your business and support cash flow. But it’s not suitable for every business, and there are some disadvantages that you should be aware of before seeking finance. 

Cost

You’ll be reducing the total amount your business receives from each sale by financing your invoices. The invoice factoring company will charge fees as part of the funding agreement and withhold a percentage of the invoice value until your customer pays. 

While many businesses could benefit from accessing funds quickly, those operating on small profit margins may benefit more from alternative financing solutions. 

Can Only Fund Commercial Invoices

Invoice financing is designed to help businesses that sell to other businesses on net terms. A recent PayPal survey revealed that 29% of small business owners believe reducing the time taken to get paid will enable them to run the business more effectively.

If your business sells to consumers, Invoice Finance may not be suitable. Instead, you may find that Trade Finance or a Business Loan is a better option. 

Funding Limited by Outstanding Invoice Value

The amount of funding you can access is based on the value of the outstanding invoices you use as collateral. This can be an excellent way to fund your cash flow needs and make sure working capital keeps up with sales. 

But it does mean you may be unable to access the funding you need to cover a sizeable one-off expense or investment. For example, if you’re looking to purchase machinery or vehicles, you may find that Equipment Finance is more suitable for your business needs.

Funding Reduces During Quiet Periods

With funding linked to your accounts receivables, you may find that your ability to raise capital is limited during quieter sales seasons. Your operating cost should also reduce during slow periods, but you may be unable to raise investment funds using Invoice Finance alone during quieter periods.

Liability For Customer Payments

Most funding providers offer recourse Invoice Finance facilities. This means your business will be liable if your customer is unable to pay an invoice that you have submitted for financing. 

While most finance companies will conduct due diligence and only fund invoices for reliable customers, there is a risk you will have to repay the funding. However, you can mitigate this risk and protect your cash flow with an additional service like Bad Debt Protection

Customers May Be Aware of Financing

Depending on the type of invoice financing facility, your customers may be aware of your relationship with the financing company. 

Invoice Factoring is a full-service solution where you outsource account management and collections to the finance company. In most cases, your customers will be aware of the facility as they will communicate directly with the funding provider’s collections team. 

Invoice Discounting is an alternative to factoring where your business retains control of collections and account management. You will collect payment from your customer, and they will be unaware of the funding facility. 

You can learn more about the different types of funding in our guide, Invoice Discounting vs Factoring?.

Is Invoice Financing Right for Your Business?

Invoice Finance could be a cost-effective way to fund your business if you sell to other businesses on net terms. You can use the capital tied up in your accounts receivables instead of putting your business into debt with a conventional bank loan or overdraft. 

It’s a good option for growing businesses that experience cash flow gaps and those that struggle to access other types of financing. As with any business funding, you should consider your current and future needs to determine the right solution.

You can learn more about this type of funding and how it works in our guide, What is Invoice Finance?.

Get a Free Invoice Finance Quote

Invoice Finance is one of Australia’s fastest and most flexible types of business finance. If you’d like to learn more about invoice financing and receive a free quote, contact our friendly team of business lending experts on the number below. 

You can also use our short online enquiry form. One of our team of advisors will get back to you to discuss your needs and help you prepare your application.