Unlock Cash Flow with Invoice Financing

If cash flow gaps are impacting your day-to-day operations, invoice financing may be the solution you’re looking for.

Instead of counting down the days until payment is due, this financing option can bridge the gap and keep your business running smoothly.

It’s not as commonly used here in Australia, but it does have several benefits and considerations for business owners to note. 

What is invoice financing?

Invoice financing, also referred to as debtor finance or accounts receivable financing, allows businesses to access immediate funds by leveraging their unpaid invoices.

It’s essentially a line of credit that transforms your outstanding customer invoices into readily available funds for your business. 

Instead of waiting for customer payments, businesses can receive a portion of the invoice value upfront from a finance provider to help maintain a steady cash flow.

What are the different types of invoice financing?

There are two invoice financing options: invoice factoring and invoice discounting.

Invoice factoring: Unpaid invoices are on-sold to a third party now responsible for collecting the outstanding funds.

Here is a simplistic overview of the process:

1. Invoice your customer for products or services rendered
2. Sell the invoices to a finance company
3. The finance company will advance a percentage (usually around 80%) of the value
4. Customers pay the finance company directly when invoices are due
5. The finance company sends you the remaining funds, less their fees

Invoice discounting: The business owner is still responsible for collecting the accounts receivable. For this option, lenders provide funding based on the unpaid invoices you submit.

Many invoice discounters charge a lending fee and will require your entire receivables ledger as collateral to assess the creditworthiness of your clients.

Here’s how it works:

1. Invoice your customer for products or services rendered
2. Send the invoices to the finance company
3. The finance company will advance a percentage of the funds as a line of credit or lump sum
4. Customers pay you when the invoice is due
5. You pay the finance company the amount advanced or the amount of credit used, plus any fees or interest.

What are the benefits of invoice financing?

The benefits include:

1. Immediate access to funds that would otherwise be unpaid invoices awaiting customer action.
2. Steady cash flow to cover operational costs, payroll, and reinvestment opportunities.
3. Flexibility to scale the financing according to your invoice volume and business needs.
4. Avoiding the burden of new loans by using existing invoices as collateral.

What are the disadvantages?

These would include:

1. Higher fees and interest rates compared to traditional business loans.
2. In some instances, your customers will be aware of the financing arrangement.
3. Finance approval may depend on your customer’s creditworthiness.

What are the eligibility requirements?

To qualify for invoice financing, criteria must be met that primarily focus on the creditworthiness of your customer.

There may also be a minimum volume of invoices required to access funds, so businesses with strong accounts receivable processes are typically better suited.

How do I apply?

The application process involves submitting business and financial information and details of the invoices.

Approval and funding timelines can vary from 48 hours to a few weeks.

Does this impact my customers?

The impact of invoice financing on customer relations is a common concern for many business owners.

Invoice factoring requires a third party to collect funds directly from customers and can damage relationships. However, clear communication can help mitigate any negative effects.

On the other hand, invoice discounting maintains confidentiality, so customers are unaware of the financing arrangement.

Is invoice financing right for my business?

This avenue of finance can be a powerful tool for improving cash flow and supporting business growth. However, the considerations listed above should be carefully evaluated to ensure the risks are worthwhile.

Ultimately, whether it’s right for your business depends on your specific needs and financial situation. A finance broker can be an invaluable asset in assessing whether there are better options suited to you.

*This blog is intended for general informational purposes only. For personalised advice tailored to your unique financial situation, please contact NMC Finance.