Invoice financing is a way for businesses to borrow cash against the value of the funds that are owed to them by their customers. The financed amount is calculated based on a business’ accounts receivable ledger, or their expected income, so it more closely aligns to future cash flows and offers a cash injection the business expects to be able to repay. Invoice financing is available in two ways: outstanding invoices which appear on a receivables ledger can be sold to a third party, who then take over collections; or invoices can be used as security for a lump sum business loan or a rolling business line of credit. Which type of option a business may choose to opt for will depend on a variety of factors including the size and age of their outstanding invoices, and their concentration over one or multiple debtors.
There are many types of business finance options available for business owners in Australia, but we have a lot to learn from international markets and the small business finance products they have on offer.
Of the different types of debt and equity finance available for businesses, suitability depends on a number of factors which include the size and age of the company seeking finance, turnover, a company’s level of debt and assets, as well as the industry they are operating within. Often, many Australian small businesses will turn to asset-backed business loans and overdrafts which are well-known and popular finance products in the Australian market. However, invoice finance - accessing funds currently tied up in their accounts receivable ledger - may actually prove the better option for maintaining healthy business cash flow.
Invoice financing can help a business to fulfil its orders, meet its payroll demands, grow and expand, and cover other day to day cash flow demands. Businesses receive an accurate cash advance that is based on their expected income, not a lump sum amount which needs to be repaid in addition to regular operating costs, thus possibly putting more strain on already restricted cash flow. Invoice financing offers a flexible credit amount that is designed to grow with the business rather than a fixed lump sum offered by a long term business loan.
What is invoice financing?
Invoice financing is a form of cash flow finance and it works like this: your business has supplied a product or service to another business and once the work is complete, your business issues an invoice. The agreed upon payment terms of that invoice may be 30 days which means that your customer has 30 days to pay that invoice amount. During this time, you’re out of pocket. Invoice financing is there to cover that working capital gap. Funds are usually secured against your entire invoice ledger – i.e. the complete value of your current and outstanding unpaid invoices - and repaid once the debt has been collected.
Where conventional long term business loans offer fixed repayment options, invoice financing offers a more flexible line of credit that can provide a business with short term cash boosts that are repaid once outstanding invoices have been settled.
To qualify for invoice financing, your business must undergo credit assessments, but these assessments are also extended to your customers. It is generally preferable that a business seeking invoicing finance have many invoices spread out over multiple debtors rather than a concentrated amount over only a few debtors. This helps the financing company mitigate the risk of those invoices not being paid.
Adoption in Australia
Whilst invoice finance in Australia is a growing sector, it currently lags behind other markets in terms of adoption and awareness. The total size of the Australian sector in 2017 was more than $75bn. This may sound like a large amount, but it actually only represents 3% of the nation's total GDP. Whereas in the UK, that number is almost 15% of the nation’s GDP.
So why aren’t business owners using debtor finance facilities as much as their international counterparts? It’s probably down to awareness and availability.
Globally, invoicing financing is a seen a regular part of doing business and is offered among a range of products and small business finance options by most financial institutions. In Australia, companies tend to rely on traditional credit to meet cash flow needs. As a result, this puts Aussie businesses at a disadvantage on the international stage when it comes to trade. Australian businesses are offered less flexibility and resilience. They’re potentially missing out on a big opportunity to improve their business cash flow.
And cash flow is a big issue for our businesses. Whilst payment terms here are lower than the regional average (25 days), 84% of businesses report late payments from their B2B customers. The cost of chasing those unpaid invoices can amount to $15,000 per year. Not only are Australian businesses experiencing serious cash flow gaps waiting for their invoices to be paid, they are also forced to spend more on their accounts receivable process chasing those payments.
Invoice finance in Australia - options for business owners
Traditionally, there are two main types of invoice financing: invoice discounting and invoice factoring. Both of these products allow businesses to access funds tied up in their accounts receivable ledger. Funds are extended pretty quickly and the total amount available grows as the business (and their invoice ledger) does. For this reason, it may also be referred to as accounts receivable financing.
The main differences between them are:
The entire ledger (or individual invoices) are sold to a factoring company. They then take charge of collections. They advance 70-85% of the value of the invoices sold and once those invoices have been paid, they remit the outstanding amount (minus factoring charges).
The difference here is that the finance company stays in the background. They do not offer any help with financial administration or credit control, which means that clients and customers remain unaware of the facility.
Where to get receivables finance
whilst traditionally the big banks have offered it along with other forms of business finance, there are now a multitude of options. The big 4 banks now have to compete with nimble and innovative fintechs such as Waddle who offer technological solutions they cannot compete with. See how Waddle is working with big banks.
The Waddle Difference
Waddle offers a modern form of invoice finance. We've built an innovative receivables finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accounting software, like Xero & MYOB and generates a finance offer within a few clicks.
Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.
It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you quick and easy access to working capital with minimal fuss. Get an offer now!