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Update: The Australian and New Zealand operations of Bibby Financial Services were acquired by Scottish Pacific Business Finance in late 2015 to create Australia’s largest non-bank invoice finance specialist. Welcome to our website.

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Everything Your Business Needs to Know About Invoice Financing and Invoice Factoring

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Working capital has been called the lifeblood of business. It’s what allows you to purchase inventory, pay your employees on time, buy and maintain equipment and reinvest. 

Unfortunately, many SMEs struggle in this department because of slow or late payments. In fact, more than half of all invoices (52%) were paid late in 2017.  

A couple of solutions that can help business owners overcome this issue are invoice financing and invoice factoring. They’re fast, efficient and help bridge the cash flow gap. However, not all business owners understand these facilities, how they work and their key differences. 

In this post, we’ll cover everything you need to know about invoice financing and invoice factoring and discuss the following:

 

So by the end you should have a firm grasp of these two financing options and understand how they’re used in an everyday context. Let’s get started.

 

What Does Invoice Finance Mean?

Invoice financing is where you borrow money using unpaid invoices as collateral. Also known as debtor finance, you receive funds in advance by borrowing against accounts receivable.

“When businesses sell goods or services to large customers, such as wholesalers or retailers, they usually do so on credit,” explains Investopedia. “This means that the customer does not have to pay immediately for the goods that it purchases. Invoice financing is a form of short-term borrowing that is extended by a lender to its business customers based on unpaid invoices.”

Rather than having to wait the full length of time for a customer to pay, this allows you to gain access to your money much quicker, enabling you to improve cash flow, purchase more inventory, pay employees, and so on. As a result, this gives you a lot more financial wiggle room than you would have if you waited for customers to pay in full. In some cases, this can mean the difference between having your money within a day or waiting 30, 60 or even 90 days. 

And considering that Australian companies are the slowest in the world at paying outstanding invoices — they were overdue by an average of 26.4 days in 2016 — invoice financing can be a huge asset and help greatly with growth initiatives.

 

How Does Invoice Financing Work?

It involves a three-step process:

  1. You upload your invoices to a lender at the same time you send them to a client. 
  2. The invoices are approved (typically within 24 hours), minus any fees.
  3. You receive a cash advancement. 

Lenders vary with their terms, but you’ll typically receive around 80% to 85% of the value of approved invoices, and the rest of the money becomes available once the client pays the invoice in full, at which point you repay the lender.

 

An Invoice Financing Example 

To better illustrate how the invoice financing process works, let’s use a simple example. 

Say you have a $10,000 invoice. You would upload the invoice to both your client as well as the lender. 

You would receive 85% of the value of the approved invoice, so the lender would give you $8,500 upfront, less any fees. 

Once the client pays in full — let’s say in 30 days — you would receive the remaining $1,500. 

In other words, you would get $8,500 within 24 hours rather than waiting net 30, and you would receive the remaining $1,500 upon client payment. In exchange, the lender charges a small fee, which is typically 2% - 5% of the invoice amount.

 

What Are the Main Benefits?

There are three key benefits of invoice financing. First, it’s extremely fast and isn’t as involved as a long-term loan. In most cases, you can gain access to working capital within a day, and the paperwork is fairly minimal when compared to most other types of loans — something that’s ideal for SMEs who need a quick cash flow injection. 

Next, it’s unsecured meaning you don’t have to put up real estate like your home or commercial property as collateral. With this arrangement, your outstanding invoices act as collateral and are all you need to obtain funding. This makes it preferable to many business owners who either A) don’t feel comfortable a secured loan or B) don’t have the property to put up as collateral to begin with. 

And given Australia’s recent housing crisis, this is more common than you may think. It also makes it easier to get approved than it would be with most traditional bank loans. 

Third, it paves the way for business growth. As we mentioned earlier, slow or late paying clients can put a serious strain on working capital and make it difficult for SMEs to take the next step. But with invoice financing, you’re not stuck waiting for invoices to be paid, and you can stay on the offense and capitalise on growth opportunities. 

 

Companies Who Have Successfully Used Invoice Financing

One of the great things about invoice financing is that it can be used by SMEs across numerous industries. Take for instance, Allstaff Australia, a blue collar recruiting agency based out of Canberra. 10 years ago, when they had $5 million in turnover, they were able to fund their business with an overdraft. 

However, they hit a plateau by going through traditional banks, and it wasn’t enough to fuel the amount of growth they were seeking. With invoice financing, Allstaff Australia was able to free up working capital and fund growth, which is what helped them reach the $90 million annual turnover mark they’re at today. They’ve now franchised their recruiting agency into each state and have received the continuous service that allows them to keep moving forward. 

Another example is cooked meats specialist Ribs and Roast. They’re a classic example of a company who experienced growing pains and needed a viable solution to keep up with demand. In 2013, they were having difficulty keeping up with orders because of the small size of their Sydney factory, which 300 to 400 square meters. 

“We were getting so much interest in our products, it was very frustrating having to turn down business due to our limited capacity,” says general manager Ryan O’Shea. “Our broker referred us to Scottish Pacific and their debtor finance facility allowed us to have peace of mind around cash flow while we transitioned to a bigger factory.”

As a result, they were able to upgrade to a new factory that’s 1,500 square meters and dramatically increase their production capabilities. Even during the phases of the greatest growth of 50% to 60% month on month, they were able to keep up. 

 

What is Invoice Factoring?

Given that the names sound so similar, many SMEs have some confusion as to how invoice financing differs from invoice factoring

The key difference is that with invoice factoring the lender (also known as a factor) buys the accounts receivables a client owes you at a discount and assumes collections responsibilities. This is slightly different from invoice financing where you borrow against accounts receivables. 

“An invoice factor purchases the accounts receivables you’re owed and takes over collecting from your clients,” adds Sarita Harbour, small business and entrepreneurship columnist at Fundera. “With invoice factoring, the lender will pay you a percentage of the total outstanding invoice amount upfront.”

At that point, it’s up to the lender to collect the full payment. In other words, the collections process is out of your hands with invoice factoring, and your clients will deal with the lender rather than you when making their payment. 

You’ll receive 80% of the money upfront, minus any fees, which are typically between 1.15% and 4.5%, and the remaining 20% once the invoice is paid in full. 

 

An Invoice Factoring Example

Again, say you have a $10,000 invoice. With invoice factoring, the lender would purchase the invoice and pay you $8,000 upfront. 

They would then take over collections responsibilities and obtain the full payment before the deadline. The lender will deduct their fees, which at 3% would be $300, and send you the remaining amount of $1,700.

 

What Are the Key Benefits?

The primary advantage of invoice factoring is that it allows you to focus more fully on running your business rather than chasing down payments. This is a full service option where a lender takes over collections responsibilities completely. In turn, this frees up time and energy you would normally spend contacting clients, following up on payments, sending reminders, etc. That way you can you place more of your attention on core business tasks. If dealing with payments isn’t your strong suit, this can be a huge help. 

Like invoice financing, invoice factoring is also an unsecured facility, meaning you don’t have to put up your home or commercial property as collateral. This can provide you with peace of mind to know that you’re not getting in over your head when seeking financing. 

Besides that, your facility limits increase along with business revenues, so you don’t have to re-negotiate as your company grows. This ensures that you can continually obtain the working capital you need to build and reinvest in your business without dealing with a lot of hassle.  

 

Taking Care of Your Company’s Funding Needs

Having adequate working capital is essential for sustained growth and keeping your business headed in the right direction. One of the biggest reasons why SMEs struggle is simply because of slow or late paying clients. 

Invoice financing and invoice factoring are two helpful solutions to this problem and can provide you with fast access to capital. But in order to choose the right facility, you must first know how each one works and which situations they’re best suited for. The information above should help clarify the details so that you select the best facility.  

To learn more about these business financing options, contact Scottish Pacific today. 

Does Invoice Financing sound like a solution that could help your business? Give us a call today on 1300 332 867

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