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What is invoice discounting and why is it so good for cash flow? For the majority of Australian SMEs, that’s still a question that needs answering.
The evidence from other countries shows that the more business owners know about invoice finance, the more likely they are to use it. Therefore, after years of blogging about all aspects of business finance with a particular focus on cash flow, it’s time to get down to basics.
Today we’ll look at exactly what invoice finance is, and how it helps trading businesses cover their working capital requirement while also freeing up funds for investment.
Invoice finance is a business funding solution that provides money upfront against the value of outstanding invoices. It is suitable for all businesses that sell to other businesses (B2B), invoice their customers and allow a period of time for those invoices to be paid.
For example, a manufacturer sells its product to several wholesalers on a regular basis. It invoices after every delivery, but its terms give the customer 30 days to pay. Some customers take longer than that, and pay only after two calendar months; and occasionally, a customer has problems and a bill goes unpaid for three months or more.
If this company used invoice finance, it could get the majority (up to 90%) of the money owed to it within 48 hours of issuing each invoice. This would make it much easier to pay its own bills, make financial planning smoother and allow it to invest its own money in scaling its operations instead of having to take out a business loan.
Invoice finance is sometimes also called cash flow finance, invoice discounting or debtor finance. A different version is called factoring, but that means a business has to give up control of its accounts receivable and have all its invoices ‘discounted’ automatically – factoring is not a popular form of finance anymore.
The cash received from an invoice finance provider is re-paid automatically when the client settles their invoice, be that 30, 60, or 90 days later. The finance provider normally collects its fee at this point (although some funders do take their fees and charges upfront), and there is usually a balance left over so you still actually receive more cash at the same time as the finance is paid off.
Invoice finance can be ‘recourse’ or ‘non-recourse’, depending on who assumes responsibility should a debtor default on a payment. However, that distinction is rendered mostly academic if trade credit insurance is included as part of the package – as it is with OptiPay.
Now you’re asking the right questions! With invoice finance, the answer is simple: you can raise a certain proportion – usually around 80-90% – of face value of your current outstanding invoices. You can then keep raising more money as you deliver more of your goods or services and invoice your customers/debtors.
If your business is growing, so does the amount of cash you can access – this is a very useful feature of invoice finance because growth, while desirable, can also be dangerous to SMEs. As you grow, you have more staff and supplier bills to pay – and they usually need paying before you can get paid for those bigger orders.
This feature of invoice finance means you always raise an amount suitable to covering your working capital requirement, whatever stage your business is at. The more you sell the more you invoice the more access to funds you get via invoice finance. Remember invoice finance is NOT a loan, it is simply advancing you, your money upfront (for a small fee) instead of waiting 30-60+ days for your debtors to pay you.
In a word: Invoices. Of course, they need to be real invoices for goods or services you have genuinely supplied; and your provider will check that your clients are good payers.
Other than that, you don’t need anything. You don’t need a credit record to get invoice finance; nor do you need a physical item such as a property for security – the invoice itself covers that; you don’t even need a business plan or growth ambitions: lots of SMEs use invoice finance simply to smooth out their cashflow and ensure they always have enough working capital to comfortably cover their expenditure.
However, by bringing all your income forward at once, and on an ongoing basis, invoice finance can also raise serious amounts of money to invest in growth, allowing you to hire more staff, buy more supplies or expand your premises and even invest in new equipment.
For details of how invoice finance could work for you, call OptiPay today. Our next blog will deal with how to choose an invoice finance provider.
This is Paul, he is one of the directors of UVS, a labour-hire provider to the construction industry. Here’s what he has to say about how OptiPay was able to help his business grow and succeed. Contact an OptiPay expert today to see how we can help you.
OptiPay offers several different funding solutions and services, one or more of which charges no interest and has no long lock in contract period, called the Fully Flexible funding option. Conditions, fees and charges apply to some of the Services provided, which may change, or we may introduce new ones in the future. Full details for all funding options (Services) including any fees and charges which may apply, is available on request. Lending criteria apply to approval of credit products. This information does not take your personal objectives, circumstances or needs into account. Consider its appropriateness to these factors before acting on it. Read the funding agreements provided, for your selected funding solution (product/service), including all the Terms and Conditions contained in agreements provided, before proceeding. *T&Cs: Minimum 12-month invoice funding contract with OptiPay. Direct clients only, offer doesn’t apply to broker introduced clients. All standard credit terms and conditions apply including credit assessment. Not applicable to existing clients.