Small business invoice finance: Your ultimate guide

small business supplier signing off on a package

While business loans are a popular option, there may be a better solution for you if your struggle is with slow-paying debtors: invoice finance.

What is invoice finance?

Invoice finance is essentially a line of credit that turns your unpaid invoices (or accounts receivables) into funding. So instead of waiting for weeks for your customers’ payments to come through, you can have access to that money ASAP. 

It’s worth noting that only business invoices are accepted. This means that while invoice finance wouldn’t suit SMEs who transact with consumers (like retailers), it could be a good fit for suppliers, wholesalers and other companies that have business clients.

How does it work?

With invoice finance, you receive a part of the invoice (usually up to 85%) upfront once you’ve delivered your goods or services to the customer. Then, after the customer has paid for the product or service in full, the rest of the funds will come through - minus any fees and charges.

As with any line of credit, this option comes with a drawdown facility, which you can dip into whenever needed.

Scottish Pacific’s senior business development manager, Patricia Kruse says invoice finance facilities can assist both the company and their customers with staying afloat in the current climate.  

“The facility can help boost a business cashflow if some of their customers are extending repayment terms during COVID. The business owner can help their own customer with their own cashflow issues by agreeing to the extended terms,”  she says.

Pros and cons of invoice financing

So is invoice finance the right option for you, or are you better off with another type of business loan? Depending on the provider, here are some of the pros and cons you might be looking at:

Invoice finance pros and cons

What’s good:

  • Fast funding: Unlike traditional business loans which can involve heaps of paperwork and debt you’d carry over a longer term, invoice finance is a short-term cashflow solution. It’s a quicker way for businesses to access extra funding (in as short as 24-48 hours), which they then pay back usually in 30-90 days with money they’re already owed.
  • Low risk: Since this financing option is secured against your invoices, you won’t have to worry about losing a valuable asset like your family home if you default.
  • No repayment stress: Given that your debt is cleared once your invoice has been settled, there’s no pressure on your end to make regular repayments, giving you a little more breathing room.
  • Flexible facility: Instead of receiving an one-off lump sum, your invoice finance facility grows with your business. As your sales and revenue go up, so too does the level of funding you can access. Kruse says that for this reason, “invoice finance facilities will become increasingly important as the business switches from survival mode back to growth.”

Watch for:

  • Lack of confidentiality: Your accounts receivables are passed onto your business lender who will then usually contact your debtors about the new arrangement. While this can save you time (since you no longer have to collect the payments yourself), it does mean that your invoice finance facility may be disclosed to your debtors. However, if you’re worried that this may affect your relationship with customers, some lenders like Scottish Pacific also offer undisclosed facilities to cater for those concerns.
  • Higher costs: Invoice finance can be a more expensive option than traditional bank loans, with fees (either a flat fee or a percentage-based fee) charged on top of each invoice. That’s why, “it’s important to shop around for the best deal,” as Kruse says. But the caveat here is that different lenders may have different fee structures, which can make it hard to compare prices.
  • Seasonal impacts: If you’re a seasonal business that stocks up during low periods, invoice finance may not offer much advantage. Kruse explains that “outstanding invoices are likely to decrease during any seasonal contraction, which means the amount that can be funded will also reduce”. However you can work around this by considering another type of finance, like a trade facility or a short-term business loan.

Is my business eligible?

Generally speaking, invoice finance isn’t difficult to obtain, as long as you can tick a few boxes. Unlike traditional business loans, your credit score, loan history and collateral don’t play a major role in determining your eligibility. 

“Businesses of all sizes and stages can easily get approved. The creditworthiness of your customers is the most important requirement for approval,” says Kruse. 

That’s because repayment entirely depends on your customer meeting their payments on time. 

To qualify for invoice finance, Kruse says you also need to make sure:

  • You’re a business selling to other businesses (i.e. B2B)
  • You’re selling products or services to other businesses on credit terms
  • Your invoices are issued for the completion of a service or delivery of goods

What happens if my customer doesn’t pay their invoice?

That really depends on your agreement with your lender. In some cases, responsibility may still fall on you to handle the bad debt and pay for those invoices. But there are also providers who will cover the cost for you, or let you swap out the invoice with another one of equal value. Others may let you choose whether or not you would want to bear the responsibility of a potential default.

Just bear in mind that if you want to be protected in the event of a default, fees will naturally be higher, as there’s more risk to the lender.

Your invoice finance options

Ready to apply? Check out a few noteworthy options below:

Waddle invoice finance
  • Funding from $10,000 up to $4 million
  • Up to 80% of invoices paid upfront
Find out more

Waddle provides invoice-based financing that integrates with your accounting platform, giving you a real-time credit limit based on the value of your outstanding invoices. It lets you access up to 80% of the money you're owed in unpaid invoices, with up to $4 million in funding available for eligible businesses. 

To qualify, your business must be incorporated, have been trading for more than 6 months, issue invoices to other Australian businesses only when work is complete, and currently have at least $10,000 in unpaid invoices. Rates are personalised depending on your business’s profile, industry and the size of your facility. A transaction fee of 0.50% to 1.50% on each transaction will also apply.

Scottish Pacific invoice finance
  • Funding from $10,000 up to $150 million
  • No ongoing fees
Find out more

Scottish Pacific is serious about catering for businesses both big and small, which is why with its invoice finance, its facilities can go from $10,000 all the way up to $150 million. While there’s an upfront fee (determined upon application) to budget for, you won’t need to worry about any ongoing fees. According to ScotPac, the application process is also super quick - just 10 minutes out of your busy work day, and you could be approved on the same day and receive up to 95% of your approved value (less fees) a day later. You have the choice to apply online or over the phone.

Octet invoice finance
  • Funding from $100k to $10 million
  • Up to 85% of your invoices paid upfront

Octet’s invoice finance hits the mark in terms of flexibility, with facilities that can hold funding between $100k and $10 million, depending on your business needs and financial situation. Octet says businesses only need to take two minutes to apply online and wait for 24 hours before hearing back. Once approved, Octet says 85% of your invoices can be paid to you in as little as 24 to 48 hours - an almost instant cashflow boost. 

To qualify for Octet’s invoice finance, your business should have traded for at least 2 years and have an annual turnover of at least $1 million a year. You should also be in an industry that provides proof of debt, have more than one business-to-business client on your receivables ledger, have a total ledger value of at least $100,000, and have an appropriate spread of customers. There is also an application fee and an ongoing service fee which is calculated as a percentage of the invoices processed.

Thornmoney invoice finance
  • Funding from $10,000 up to $2 million
  • Only pay for what you use
Find out more

Thornmoney understands that one size doesn’t fit all. So with its invoice finance, it offers tailored rates as well as facilities that can range from $10,000 up to $2 million to cater for different business sizes and purposes. There is no minimum turnover requirement; you’ll just need to have been trading for more than 9 months and raise invoices with Australian businesses after work is completed. Thornmoney also says online applications should take just 15 minutes and approval can happen in 24 hours. Just keep in mind that there’s a set-up fee and a transaction fee will be charged for each invoice funded (determined upon application).

For more business finance options, visit our business loans comparison table.

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