Invoice finance is a way for businesses to borrow against funds owed to them by their customers. Outstanding invoices can be sold to a third party, who then take over collections or used as security for a loan or a line of credit.

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.

And whilst many will turn to asset-backed business loans and overdrafts, accessing funds tied up in their accounts receivable may be the best option. It can help them fulfil orders, meet payroll, grow and cover day to day cash flow needs.

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.

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

There are two main types of invoice finance, discounting and factoring. They're similar in that they allow companies access to immediate funds based on their unpaid invoices.

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 receivables 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.

See how Waddle can help your business grow!

Find out if our innovative invoice finance platform is right for you. Simply connect your accounting package for a tailored finance offer.