Cash flow boost? Invoice finance could be right for your business

Managing cash flow is crucial to the success of any business. But accurately forecasting how much money comes and goes can be difficult, particularly if you depend on the timely payment of invoices by customers.

Customers can sometimes take months to pay, and in that time, everyday costs continue to pile up. Invoice finance lets businesses get around this problem by borrowing against the value of their unpaid invoices.

This cash flow boost can be used to cover operating expenses, meet payroll obligations, or invest in the growth of the business. And as customers settle their invoices, the loan is steadily paid off.

Below, we explore some of the ways that invoice finance can help Aussie businesses grow, and the situations where it might be more preferable to taking out a regular loan.

For founder and CEO of Timelio, Charlotte Petris, invoice finance offers businesses a degree of flexibility that might not be available with traditional loan products. 

That includes the quick transfer of funds (usually within 24 hours of approval), control over cash flow, and the ability to select the amount of finance needed without being locked into any minimum funding limits.

An immediate injection of capital can also let businesses jump on opportunities to reinvest as they come up, rather than waiting a month or longer for cash from outstanding invoices to arrive.

“By improving working capital and unlocking the cash tied up in unpaid customer invoices, invoice finance enables businesses to hire new staff, win new contracts and fuel growth,” said Petris.

Of course, invoice finance is intended for businesses that offer payment terms and have other businesses as their customers. Of these, it can be particularly useful for companies that don’t have collateral readily available.

“Because the invoice or receivable is used as security for the funding, it is a popular choice for services businesses that do not have extensive assets or plant and equipment on their balance sheet to use as security,” said Petris.

Co-founder and director of Waddle, Simon Creighton, explains that applicants typically have invoices that are factorable (meaning they are suitable for funding) or raised to reputable businesses.

“A factorable invoice ledger will generally have a good spread of debtors, with invoices that are raised in arrears, include all necessary information (payment terms, date, details of both businesses), and ideally some form of proof of delivery,” he said.

“Invoices raised in arrears is an important point. If the work has been delivered in full then there is less risk for the lender, as the invoice will most likely be paid.”

Generally, a business applying for invoice finance should tick the following boxes:

• They hold an ABN or ACN

• They have been trading for a sufficient amount of time (usually 9 months)

• They invoice other businesses 

• Their invoices are getting paid within 90 days of being raised

• They have a minimum of 3 debtors

• Their ledger size is at least $10,000

Some finance companies, like Waddle, have taken steps to reduce concentration limits, meaning it’s possible for businesses to get funding even if they have only one debtor.

While business loans are a popular option, a loan which doesn’t change in line with cash flow demands isn’t always the best bet, particularly for companies that are (or could be) growing rapidly and require additional cash.

“For these businesses it can be hard to accurately predict cash flow requirements and having a finance facility that is flexible and grows with the demands of the business is critical,” said Petris.

At the same time, invoice finance can sit idle until it needs to be used, giving business owners peace of mind.

Invoice finance may also be easier to obtain than other forms of funding. That’s because a business’s credit score, borrowing history and security (if any) are sometimes of less interest to lenders than the creditworthiness of its customers.

Though technically a kind of invoice finance, invoice factoring differs in important ways. Put simply, invoice factoring lets businesses in need of short-term finance sell their accounts receivable ledger to a third party, who then assumes responsibility for collecting payment. 

The factoring company will offer an advance cash payment of around 70-85% for each invoice in a business’ ledger, with the rest of the balance (minus factoring fees) paid once the money owed has been collected.

Creighton says factoring can be quite expensive compared to other forms of business finance, and comes with its own set of problems around confidentiality. 

“Factoring involves selling your invoices to a lender who takes over collections on your behalf. This means that it is not confidential, and your customers are aware of the need for funding,” he said.

While outsourcing debt collection to another company can be useful, there’s always the possibility that customers won’t appreciate having a third party chase them up over unpaid invoices.

Where invoice finance differs is that it doesn’t involve selling your invoices — just borrowing against them. Businesses will also be able to choose which invoices they wish to fund, whereas with invoice factoring you’re typically required to sell your entire ledger.

Invoice finance is relied on by businesses across a number of industries - including manufacturing, labour hire, construction, transport and logistics - to fill gaps in cash flow. 

And unlike a business loan, the credit limits offered through invoice finance grow as more invoices are raised, making it easier for businesses to capitalise on opportunities to grow (such as by purchasing equipment and hiring new staff). 

For more information, browse our small business invoice finance guide.