Updated 2nd August 2023

Cash flow is a necessary component of every successful business but for many, managing access to working capital is easier said than done.

While there can be many reasons for this, one of the common causes is the cash flow gap due to a delay in businesses receiving payment for issued invoices due to extended payment terms. That’s where Invoice Finance comes in.

Invoice Finance – fast access to your money

Invoice Finance solutions allow businesses to raise capital quickly to smooth over the rough patches in their cash flow. Like a traditional bank loan, this financial instrument provides capital funding, but it is fundamentally different in the fact that unlike a loan or overdraft, the money provided is actually raised from ‘within the business’ itself.

Invoice Finance leverages the value of the outstanding, unpaid invoices to provide advanced and upfront cash for the business. Instead of having to wait for the 30 odd days outlined in your invoice payment terms to access the capital owed to you, a business can get an advance of up to 95% of the total amount. Often, this is accessible within 24 hours!

Not to mention the fact that the average small business owner in Australia spends 12 days each year chasing unpaid invoices rather than focusing on growing their business.

There are many benefits to using Invoice Finance to capitalise on growth opportunities or to weather the storm of cash flow management issues. However, understanding the pros and cons of Invoice Finance is essential if you’re considering whether it’s right for your business.

The Pros of Invoice Finance

1. Improves Business Cash Flow

Invoice Finance is primarily a solution to help businesses improve their cash flow. Through accessing outstanding payments due to it, a company can bridge the gap between raising an invoice and actually being paid by their respective customers or clients.

Without Invoice Finance, the capital remains locked up in accounts receivable which can cause undue strain on other operations in the business reliant on access to that money. 

2. Extended Payment Terms Can Be Offered

Extended payment terms is one of the most common obstacles a business has to face when trying to succeed and grow. In Australia, for example, it’s not uncommon for payment terms to even stretch to as long as 60 days or more! 

This can seriously impact a business’s ability to manage cash flow effectively and to continue thriving. With Invoice Finance, it’s easier to extend payment terms to your customers (and even win new ones) without having to be concerned about the impact on your access to capital in the meantime.

3. Highly Accessible Compared to Bank Loans

Traditional bank loans and business financing often require strong credit ratings and/or demonstrable trading history. Invoice Finance requires none of that and has significantly more flexible criteria. 

This allows businesses who may be newer, smaller or in an active growth phase to easily access working capital without having to worry about qualifying based on strict red tape. 

4. Quick Access to Working Capital

Businesses need to be agile in order to succeed and, with Invoice Finance, access to working capital can be as close as just 24 hours away. This allows you and your business to capitalise on unique and time-sensitive growth opportunities and maintain control of how and when you need access to funding. 

Whether it’s an unforeseen cash flow gap due to an operating expense or the funding of an opportunity, this financial solution can help quickly raise the funds you need. 

5. Access to Capital to Fund Growth

It’s not just the simplicity and speed of Invoice Finance that makes it suitable as a financial solution for growing businesses. This form of funding can grow in line with one’s business as it is based on the value of invoices issued. In other words, as your business begins to issue more invoices for greater overall value, the amount of working capital you have access to grows accordingly.

Unlike traditional loans and overdraft facilities, with Invoice Finance your credit limit is flexible and commensurate with the size of your business and your sales revenue.

6. No Need for Property as Security

One of the key advantages of Invoice Finance is the lack of a need for personal property as security for the funding. Funded from inside the business, this facility uses the outstanding invoices themselves as collateral.

As a business owner, this provides peace of mind knowing that your home or other assets aren’t at risk. Whereas with loans and overdrafts, a bank may require property as security. 

7. Outsourcing Accounts Receivables Management

Smaller businesses who may not have a dedicated accounts receivable department may benefit from being able to outsource their account management, including collections on outstanding invoices. 

There are different forms of Invoice Financing, including one that offers full-service factoring through the financial institution. This means that your growing business will not need to worry about chasing up invoices from customers.

Being flexible, you can even opt for Selective Invoice Financing which allows you to decide when and how you want your invoices’ value paid for upfront.

The Cons of Invoice Finance

1. It Can Be More Costly

Invoice Finance is not a free hand out of working capital. Financial providers charge fees as part of the funding agreement. This will reduce the total amount of money you receive from your outstanding invoices and in exchange you’re able to access the capital in advance.

Additionally, a percentage of the invoices value is withheld by the provider until the unpaid invoices are settled. (Often this is around 5%.)

2. Not Available for All Invoice Types

Invoice Finance is only available for businesses that issue commercial invoices. If you’re a business who doesn’t sell goods or services to other businesses on net terms you won’t be able to access this form of funding.

Other options for business-to-consumer companies are Trade Finance or a Business Loan.

3. Maximum Funding Available

The flip side of the flexibility in Invoice Financing growing in line with your company is that the funding is capped. Limited, by definition, by the value of your outstanding invoices, if your business requires more working capital alternative forms of funding may be required.

For example, Equipment Finance can help with the purchasing of new machinery or vehicles. Invoice Finance uses the unpaid invoices as collateral which means that only the agreed to percentage of the value of those invoices is accessible to the business.

It’s also important to realise that if your business has quiet sales periods, your access to funding during this time will be impacted as a result. Of course, operations may similarly slow down, but if you need continued access to advanced cash, Invoice Finance will have limitations during these seasonal fluctuations. 

4. Liability for Your Customers’ Payments

In many instances, Invoice Finance comes with something that is referred to as “recourse” as part of the facility. All this means is that in the event that your customers do not or cannot settle an invoice, your business remains liable to repay the loan to the financial provider. 

The risks of this happening are mitigated by due diligence by the financial institution prior to providing the advance but the risk cannot be entirely eroded. If this is a concern of yours, however, consider adding some protective services in the form of Bad Debt Protection. 

5. Limited Confidentiality

There are two types of Invoice Finance: Factoring and Discounting.

With Invoice Factoring, your financial provider will offer a full-service solution (as referred to above) where they will be in charge of collecting outstanding payments and settling invoices. If you opt for this facility, your customers may become aware that you are engaging in this business funding solution

Invoice Discounting does not include full-service account management and collections which allows you to maintain more confidentiality as you remain the sole entity interacting with customers. 

Should Your Business Access Invoice Finance?

Invoice Finance is often a cost-effective, flexible and fast way to fund business growth and cover gaps in cash flow.

There are many advantages to being able to leverage the locked up value of your outstanding invoices without the liability of a conventional bank loan or overdraft facility.

Nevertheless, it may not be quite right for everyone. All businesses are different and have different requirements. That’s why we suggest you contact the ScotPac team of specialists for a free Invoice Finance quote. 

All you need to do is fill in our online enquiry form and one of our advisors will contact you to provide you with a confidential, custom consultation to see if Invoice Finance is right for you.