Following the recommendations of the Royal Commission Invoice Finance, many brokers are considering expanding their business finance offerings to ensure future growth.
Additionally, increasingly strict lending conditions mean that Invoice Finance is increasingly used by small businesses that cannot get what they need from traditional lenders.
However, as with any product, it is essential to understand both the disadvantages and advantages.
Consider the Time Value of money.
Invoice financing allows businesses to reinvest their money into their business more quickly. When considering the cost of invoice financing, it is essential to remember that a dollar today is worth more than the dollar you will receive tomorrow.
By recovering their funds faster, businesses can reinvest them based on their gross profit margin. Accumulated month after month, it’s easy to see that the value of faster payments can easily offset the cost of financing invoices.
Not all Invoice Finance was created equal.
The terms factoring, invoice discounting, and supply chain finance are used more or less interchangeably. There are, however, obvious differences.
Selective invoice financing: Customers can choose which invoices to finance, when, and at what percentage (within prescribed limits).
Factoring: The service provider generally assumes the role of managing the debtors’ ledger and controlling payments. Suppliers often want to manage the entire ledger, so they cannot choose which invoices to fund.
Invoice discount: a financier advances a percentage of the face value of an invoice, often around 80%. However, the company retains control of invoice payment.
Peer-to-peer (P2P): This is making a lot of noise globally regarding invoice financing, loans, and investments. Thanks to invoice financing via P2P, the company seeking funding can directly access investors via a technological platform. You specify the terms you need, and the investor sets the interest rate.
Flexibility and transparency = certainty
The most significant criticism of some financial models is the stringent contracts that service providers place companies into.
We often work with businesses to find ways to terminate contracts that no longer meet their needs. Unfortunately, this usually means huge exit fees to pay to the supplier.
For invoice financing to be most beneficial to a business, it must be “available.” They can choose when to use it or not without incurring penalties.
Help in times of growth
Businesses experiencing rapid growth often struggle because they have exhausted their credit lines, have already remortgaged their home, or have racked up ATO debt. This is where invoice financing can be of great help:
| ATO Debts | A suitable invoice financing mechanism can also help businesses pay off their ATO debts, freeing up their balance sheet to finance new equipment or other capital expenditures. |
| Exhausted lines of credit | Let’s say a company gets a new contract and needs to hire more staff or buy new machinery. But with your house already on the line, overdrafts, and credit cards maxed out, your options may be limited. By using invoice financing, the company can pay off existing debts, paving the way for additional funding. |
| No property security | Because the invoices themselves are usually the only collateral required, business owners do not need to provide homes or other personal property as collateral. |
Understand facility limits
Credit line limits are generally set based on the book value of the debtors. However, most lenders will change this limit if invoices are late or concentration limits are imposed (because the ledger becomes heavily skewed toward one customer or industry).
So, one day, the limit will be $500,000; after applying late invoices and concentration limits, the company will only be able to access $400,000.
It is essential to understand how late payments and concentration limits can affect the facility’s cap before signing a contract.
Know the contract
The most important thing is to read the fine print. Often, high account opening and maintenance fees can increase the actual cost to the business far beyond what was initially stated.
Often, this only becomes apparent when the client has signed the contract several months later. Look for a clear, straightforward contract allowing the company to use the facilities without financial compensation.
