Small Business Invoice Financing: Your Ultimate Guide
As businesses resume operations after a difficult period of confinement, finding ways to improve cash flow has become simply essential.
While business loans are a popular option, there may be a better solution for you if you’re struggling to pay slow debtors: invoice financing.
What is invoice financing?
Invoice financing is essentially a line of credit that turns your unpaid invoices (or accounts receivable) into financing. So instead of waiting weeks for payments from your customers to arrive, you can access that money as soon as possible.
Please note that only professional invoices are accepted. This means that while invoice financing would not be suitable for SMEs that transact with consumers (such as retailers), it could be suitable for suppliers, wholesalers and other businesses that have business customers.
How it works?
With invoice financing, you receive part of the invoice (usually up to 85%) as soon as you have delivered your goods or services to the customer. Then, once the customer has paid for the product or service in full, the rest of the funds will be released – less any fees and charges.
As with any line of credit, this option comes with a drawdown facility that you can draw on if needed.
Patricia Kruse, Scottish Pacific’s senior business development manager, says invoice finance facilities can help both the business and its customers stay afloat in the current climate.
“The facility can help increase a company’s cash flow if some of their customers extend repayment terms during COVID. The business owner can help his own customer solve his own cash flow problems by agreeing to the extended terms,” she says.
Advantages and disadvantages of invoice financing
So, is invoice financing the right option for you, or do you prefer another type of business loan? Depending on the provider, here are some of the pros and cons you might consider:
- Quick Funding: Unlike traditional business loans which can involve piles of paperwork and debt that you’ll carry over for the longer term, invoice financing is a short-term cash flow solution. It’s a faster way for businesses to access additional funding (in as little as 24-48 hours), which they then typically repay in 30-90 days with money already owed to them.
- Low risk: Since this financing option is secured against your bills, you won’t have to worry about losing a valuable asset like your family home in the event of a default.
- No repayment stress: Since your debt is settled once your bill is paid, you don’t have to make regular repayments, giving you a bit more leeway.
- Flexible installation: Instead of receiving a one-time lump sum, your invoice finance facility grows with your business. As your sales and income increase, the level of funding you can access also increases. Kruse says that because of this, “invoice financing facilities will become increasingly important as the business transitions from survival mode to growth.”
- Lack of confidentiality: Your accounts receivable are transferred to your commercial 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 payments yourself), it does mean that your bill financing facility can be disclosed to your debtors. However, if you are concerned that this will affect your relationship with customers, some lenders like Scottish Pacific also offer undisclosed facilities to address these concerns.
- Higher costs: Bill financing can be a more expensive option than traditional bank loans, with fees (either a fixed fee or a percentage-based fee) charged on top of each bill. 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 difficult to compare prices.
- Seasonal impacts: If you’re a seasonal business that sources supplies during off-peak times, invoice financing may not offer much benefit. Kruse explains that “outstanding bills are likely to decrease during any seasonal contraction, which means the amount that can be financed will also decrease.” However, you can circumvent this problem by considering another type of financing, such as a trade facility or a short-term business loan.
Is my business eligible?
Generally speaking, invoice financing isn’t hard to get, 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 be approved. The creditworthiness of your customers is the most important requirement for approval,” says Kruse.
This is because reimbursement is entirely dependent on your client meeting their payments on time.
To qualify for invoice financing, Kruse says you also need to ensure that:
- You are a business selling to other businesses (i.e. B2B)
- You sell products or services to other businesses on credit
- Your invoices are issued for the performance of a service or the delivery of a good
What happens if my customer does not pay their invoice?
It really depends on your agreement with your lender. In some cases, the responsibility may still lie with you to manage the bad debt and pay those bills. But there are also providers who will cover the cost for you or allow you to swap the bill with one of equal value. Others may let you choose whether or not you want to take responsibility for a potential defect.
Just keep in mind that if you want to be protected in case of default, the fees will naturally be higher, as there is more risk for the lender.
Financing options for your invoices
Ready to apply? Check out some notable options below:
Waddle Bill Financing
- Financing from $10,000 to $4 million
- Up to 80% of invoices paid in advance
Waddle provides invoice financing that integrates with your accounting platform, giving you a real-time credit limit based on the value of your outstanding invoices. It gives you access to up to 80% of the money owed to you in unpaid invoices, with up to $4 million in financing available to eligible businesses.
To be eligible, your business must be incorporated, have been in business for more than 6 months, issue invoices to other Australian businesses only when work is complete, and currently have at least $10,000 in outstanding invoices. Pricing is customized based on your business profile, industry and size of establishment. Transaction fees of 0.50% to 1.50% on each transaction will also apply.
Scottish Pacific Bills Funding
- Financing from $10,000 to $150 million
- No ongoing fees
Scottish Pacific takes catering for businesses large and small seriously, which is why, with its per-invoice financing, its facilities can range from $10,000 to $150 million. While there are upfront fees (determined upon request) to budget for, you won’t have to worry about ongoing fees. According to ScotPac, the application process is also very fast – just 10 minutes out of your busy work day, and you could be approved the same day and receive up to 95% of your approved value (minus fees) a day. later. You have the choice of applying online or by phone.
Byte Invoice Funding
- Financing from $100,000 to $10 million
- Up to 85% of your invoices paid in advance
Octet’s invoice financing hits the mark in terms of flexibility, with facilities that can hold financing between $100,000 and $10 million, depending on your business needs and financial situation. According to Octet, companies only need two minutes to apply online and wait 24 hours before receiving a response. Once approved, Octet says 85% of your bills can be paid to you in as little as 24-48 hours – an almost instant cash boost.
To qualify for invoice financing from Octet, your business must have been in business for at least 2 years and have an annual turnover of at least $1 million per year. You must also belong to an industry that provides proof of debt, have more than one business-to-business customer in your debt register, have a total value of at least $100,000, and have an appropriate customer breakdown. There is also an application fee and ongoing service fee calculated as a percentage of invoices processed.
Financing Thornmoney bills
- Financing from $10,000 to $2 million
- Only pay for what you use
Thornmoney understands that one size does not fit all. So, with its invoice financing, it offers tailored rates as well as facilities that can range from $10,000 to $2 million to meet different business sizes and goals. There is no minimum turnover requirement; you will just need to have been trading for more than 9 months and be invoicing with Australian companies once the work is complete. Thornmoney also says online applications should only take 15 minutes and approval can happen within 24 hours. Remember that there are setup fees and transaction fees will be charged for each funded invoice (determined upon request).
For more business financing options, see our business loan comparison chart.
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