Invoice finance is a way for businesses to access funds by borrowing against their outstanding invoices.
Payments terms on invoices mean that often they will not be settled for a month or more after a product or service has been delivered, causing cash flow issues for the supplier. Invoice finance gives them access to immediate cash, alleviating these problems and allowing them to focus on running and growing their companies.
There are many funding options for business owners in Australia. Different types of debt and equity finance are available and suitability depends on a number of factors. These include the size and age of the company, turnover, level of debt and assets and the industry they are in.
In addition to invoice finance, secured and unsecured loans, business credit lines and overdrafts are common forms of financing for a small business. There are also more specific types of funding that suit particular circumstances, such as trade finance, equipment finance and supply chain finance.
How invoice finance works
It works like this. You’ve supplied a product or service to another business and once the work is complete, they have 30 days to pay their invoice. During this time, you’re out of pocket. Invoice finance is there to cover that gap. Funds are usually secured against your entire invoice ledger and repaid once the debt has been collected.
Invoices can be sold to a third party, who will take over collection of the debt or can used as security for a loan or a line of credit.
Adoption in Australia
Whilst the usage of debtor finance in this country is increasing, we're still some way behind our international counterparts in terms of both awareness and utilisation.
In Australia in 2017, the size of the industry was $75bn. Whilst this is obviously a huge number, as a proportion of GDP, it's just 3%. As a comparison, it's almost 15% in the United Kingdom.
So this begs the question, why aren't Aussie companies using invoice finance as much as businesses overseas when it brings clear benefits? The probable answer is that most are unaware of it. In other markets, it is commonplace and offered as a core product by the banks. In Australia, traditional credit such as business loans or a business line of credit are relied upon for covering operational costs.
This could have the result of disadvantaging Australian companies on the world stage. It gives them less flexibility and means that cash flow issues could be inhibiting their growth.
And cash flow is a huge problem in our market. Credit terms here are less than the regional average (25 days) and 84% of companies report receiving late payments. It can cost $15k per year chasing those invoices.
Types of invoice finance in Australia
The main differences are:
- Invoice factoring - The invoice ledger (or individual invoices) are sold to the financier, who is responsible for collecting the debt. 70-85% of the invoice values are advanced and after collection, they transfer the balance (minus their fees).
- Invoice discounting - A loan or a line of credit is secured against the invoice ledger rather than it being sold. The finance company remains in the background and they are not responsible for collections. Clients will therefore be unaware of the need for funding.
Where to get invoice finance
Traditionally big banks offered it alongside other kinds of commercial funding, but now there are a multitude of non-bank options. These include innovative fintechs like Waddle, who offer integrated software solutions giving businesses ease and automation the banks cannot compete with. Read about how Waddle is currently working with big banks.