Last Updated On April 5th, 2022.
Invoice Finance is a business funding solution. It enables a business to access a line of credit using its outstanding customer invoices as collateral. This type of financing is often used to increase business cash flow to meet short-term liquidity needs.
A business can access funds much faster than if it had to wait for its customers to pay. Invoice Finance can be used to raise capital quickly to pay suppliers, cover overheads, and reinvest in growth.
Invoice financing can help businesses overcome cash flow gaps caused by extended payment terms and seasonal sales. It can provide predictable working capital and ensure cash inflows keep up during periods of rapid growth.
Invoice Finance is also known as debtor finance and accounts receivable financing.
Invoice Finance in Australia
The use of Invoice Finance in Australia is increasing. But it 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 and extended payment terms globally. According to ASBFEO, Australian companies are paid 26.4 days late on average. This is compared to 5.85 days late in the UK and 7.1 days late in the US.
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 small and medium-sized businesses 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 helps SMEs to bridge the gap between raising an invoice and receiving payment.
Types of Invoice Finance
There are many invoice financing options for SMEs in Australia. 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. The remaining balance, less fees, is transferred after collection.
This type of financing can be beneficial for small and medium-sized businesses that don’t have a dedicated internal collections department.
The finance company is responsible for collecting 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. The remaining balance, less fees, is released once payment has been collected.
Discounting is generally more suited to large and medium-sized businesses. With this type of funding facility, you retain the responsibility for collecting unpaid invoices.
It allows for the relationship with the finance company to remain confidential, but you’ll need to have an established accounts and collections department.
Selective Invoice Finance
Selective Invoice Finance allows you to choose which invoices you want to finance. Also known as spot factoring, this type of invoice financing can benefit SMEs with a small volume of high-value invoices.
If your business sells to larger clients on net terms, you can bridge the gap between raising an invoice and receiving payment. You can turn selected unpaid invoices into an immediate cash flow injection.
Invoice Finance vs. Unsecured Business Loans
Unsecured business loans provide a one-off lump sum. The money borrowed is repaid through a series of regular repayments over a set period.
Business loan providers often require applicants to have been trading for a minimum period to qualify for a loan. In addition, you will need to demonstrate how you will repay the loan amount. It’s also common for applicants to be required to provide a personal guarantee.
Invoice financing is much more flexible. You don’t need to worry about fixed repayment terms. The funding provider receives repayment when your customer settles the invoice.
The cost of an Invoice Finance facility is typically calculated as a percentage of the total invoice value. Because of the accounts receivables collateral, Invoice Finance is generally seen as less risky for the lender. This often means invoice financing is more cost-effective than an unsecured loan.
Invoice financing is also more accessible to startups and SMEs with ATO debt. It’s a good option for those who don’t meet the strict lending criteria for a business loan.
Will My Customers Know That I’m Using Invoice Finance?
Many finance companies offer confidential Invoice Discounting facilities. Generally, Invoice Discounting is more suitable for established companies with an in-house collections team.
Disclosed Invoice Factoring is typically more suitable for businesses that could benefit from outsourcing collections to the invoice financing provider.
Here at ScotPac, we offer a range of flexible solutions that can be tailored to the needs of your business. You can choose from a come and go facility with no lock-in or a full-service facility that includes collection and account management services.
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 Right for Your Business?
A short trading history or low credit rating can often mean traditional funding sources are out of reach for many small and medium-sized businesses.
Invoice Finance is a much more accessible source of funding well suited to small and medium-sized businesses. The finance company will primarily look at your customer’s credit rating and ability to pay.
If you supply larger businesses on net terms, Invoice Finance can be a great way to smooth cash flow gaps between payments. It’s a fast source of financing that can help you manage working capital.
You can use your improved cash flow to reinvest and generate more profit than the invoice financing cost. Invoice Finance can fuel sustainable growth and help you to become more profitable. It’s a cost-effective funding solution used by SMEs in a wide range of sectors.
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 working with you to put funding 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 learn more about confidential Invoice Discounting or end-to-end factoring, speak to one of our friendly Invoice Finance advisors today.