Kate Carnell, Australia’s Small Business and Family Enterprise Ombudsman has been quoted as saying sluggish payment times for small business suppliers are “the biggest source of anxiety” for the sector.
And while the Greens plan to introduce legislation later this year to enforce penalties for corporations who make late payments to small businesses, this is only one of the stresses small business owners have to face when it comes to managing their monthly budgets.
The good news is there are solutions to stagnating cash flow that exist already, and which you should be tapping into, to help ease any short term liquidity blockages that stem from business variables outside your direct control.
And thanks to innovation in the financial lending sector, these solutions are increasingly affordable and easy to access. Invoice financing is one of these financing options and is a lending model that is rapidly growing in popularity locally.
While an estimated 1 in 5 UK businesses doesn’t know about invoice finance, in Australia the sector is undergoing rapid growth thanks to a boom in technology-driven offerings across the banking and non-bank lending sector.
In fact, a recent KPMG report on alternative financing in the Asia Pacific region found invoice finance is now the third largest lending type in the alternative market, with growth of 24 percent in 2016 to US$129.91 million.
How does invoice finance work?
Invoice finance is designed to help you make your unpaid invoices liquid sooner, so you can put that cash towards growing your business. Unlike a standard loan, you are not taking on debt, simply freeing up capital already owed to your business. For this reason, it can be an attractive and manageable funding mechanism.
There are two distinct flavours of invoice finance – factoring and invoice discounting. One of the primary differences between the two is whether the collection of invoice payment remains handled by you or by your finance provider.
How does invoice factoring work?
In simple terms, factoring involves your business selling invoices direct to a financing company for slightly less than the total amount owed. The factoring business then contacts your client directly to collect the final payment, passing what remains through to you, while retaining a small amount as their fee. Factoring essentially takes the entire collections process off your hands, and your client is fully aware of their involvement in the managing and handling of your sales ledger.
While some businesses are happy to outsource this administrative overhead, others prefer to remain as the single touch point for a client across all aspects of the relationship and keep any financing arrangement they have in place with a third party confidential. This means invoice discounting can be a more attractive, alternative option.
How does Invoice discounting work?
Invoice discounting is a confidential service that allows your business to receive a cash advance against your outstanding invoices. Unlike factoring, with an invoice discounting arrangement you are still responsible for collecting payment direct from your customers.
As a general rule, most invoice financing companies will advance anywhere up to 85 – 90 percent of the invoice, however depending on your credit history or the size of the invoice, this may differ.
Rather than outdated paper-based models, tech-enabled invoice financing companies now allow business owners to upload their invoices onto a online platform, with up to 85 percent of approved invoices able to be financed within 24 hours.
You can learn more about the benefits of invoice financing here.
While both invoicing discounting services and factoring businesses do charge a fee, the free flow of capital back into your venture allows you to jump on growth opportunities as they arise. You need to do your numbers to understand if this sort of cost is worth incurring based on the potential profit that can be generated from opening growth channels sooner.
How do I know if invoice financing is right for my business?
Before you start researching the market for invoice financing providers, it’s important to identify if this type of financing arrangement will suit your business and growth objectives. Luckily the checklist is small. Typically speaking, if your company offers payment terms to buyers, is seasonal in nature or perhaps contracts to corporates who can dictate longer than average terms, then invoice finance can be the cash flow smoothing hero you’ve been looking for.
Wondering if your peers are active consumers of this type of finance? Well, according to Real Business Rescue, the most common industries using invoice financing include professional services, construction companies, logistics providers, manufacturers, print and publishers, recruitment businesses, companies in the transport industry, wholesalers and security companies.
Ready to take the next step?
If this article has resonated with you, and you’re ready to tap into your own capital sooner to grow your business, it may be time for you to start evaluating potential invoice finance providers. As a starting point, Octet offers a range of debtor finance options, including invoice discounting and factoring, and all available online. To learn more get in touch with our team today, who can also help you compare to other finance options on the market.