You are an SME that needs capital to operate and grow: so how should you raise funds?

There are many forms of business finance available in Australia today, but we’re going to look at a clear-cut choice between using Invoice Finance, or applying for a business loan.

What is best for your business will depend on your size, circumstances, trading outlook and funding needs. However, we believe there is a strong case to be made for Invoice Finance also known at Debtor Finance – especially so because many SME owners simply haven’t considered this form of funding to help with their business’ growth, because they are unfamiliar with it or in some cases have never heard it as a form of funding.

Let’s compare Invoice Finance to getting a business loan based on three key criteria: Availability, Cost and Flexibility.

Availability

Getting a business loan from a bank is not as easy as it used to be: Since banks were forced by regulators to be cautious in their lending following the financial crisis, they rightly tend to insist on a rigorous application process so that they can assess whether your business will be able to repay its debt. Unfortunately for SMEs, this means that it can take weeks or even months for their funding to be approved, if at all. Additionally, some form of property is often required as security and many applicants are turned down at the end of the process because they don’t have a perfect credit history or trading background.

There is also business loans from the raft of alternative lenders or ‘fintechs’ out there which can be far quicker and easier to come by than the banks, but are much more expensive, require weekly or fortnightly repayments of principal and interest (regardless of whether or not the business has the cash to service the loan) and are often simply short term fixes without the long term benefits required by a business to keep growing.

Invoice Finance, on the other hand, can be fast to arrange: With a modern fintech provider like TIM Finance (TIM), you could have an account within days of applying, and raising money against invoices usually takes less than 48 hours. What’s more, Debtor Finance is based on current trading, not what you did last year or the one before. It also doesn’t depend on your business being profitable. You don’t need a long credit record or accounts going back 3+ years – just good customers (being businesses with ABN numbers and not consumers) who you invoice regularly amounting to over $50,000 per month, which you provide trade terms to. If that is the case, the availability of Invoice Finance is a great option to use in order to access the working capital required, to grow the business: Feel free to give TIM a call and we’ll get you started!

Cost

Comparing costs between these two very different forms of finance is not easy. To do it properly, you need to take the full cost of a business loan over its term – typically one to two years – and contrast that with the cost of discounting invoices as and when you need them to ensure your funding needs are covered over the same period. In both cases, charges can vary dramatically between providers so whatever you choose you will want to shop around.

Banks charge interest on their loans and this is regarded as the main cost, but its not the only one: many lenders now charge so many extra fees that the total price paid by a business over the lifetime of the deal (when converted to a percentage of the principal borrowed) is much higher than the headline rate suggests. Such fees are often classified as: undrawn line fees; banking fees; access fees; application fees; approval fees; utilisation fees; management or admin fees, to name just a few. Unsecured loans especially from a range of fintech providers, will although be much more flexible than the banks and far quicker to approve, will tend to be even more expensive (when taking into account the true annualised cost over the life of the loan), to both the banks, invoice finance providers and course to those offering funding secured against property.

Invoice finance can also involve extra fees, but these tend to be very small relative to the effective interest rate charged and management fees. The flexible Debtor Financing or Invoice Discounting service offered by TIM Finance allows you to choose how much you want to raise against your invoices at any one time and you will pay accordingly. Each time your clients pay up and clear an invoice, the financing is repaid and a small fee taken (think of it as an early settlement discount for getting paid within 24/48 hours of issuing the invoice). It is also important to note that with Invoice Finance it is not a loan – so there is not principal and interest to repay weekly or bi weekly from the minute you access the funds. Fees are only charged (in the case of TIM), when your client or debtor pays their invoice/s, 30-60+ days after you issue the invoice. Over a year or even over two years, these the fees and charges generally add up to being far less than the cost of an unsecured non-bank business loan; and that without having to be tied into regular repayments that drain your cash flow.

Flexibility 

This is an area that Invoice Financing wins hands down: even if you choose one of the more rigid forms of invoice financing, the amounts you raise will naturally vary with the fortunes of your business, giving you more money when you are expanding (ie: your sales are increasing as a result of you invoicing more) and scaling back the finance (and costs) when times are quitter (many businesses in many industries have quiet cycles within the year) or the business encounters a tough trading period. If you choose a flexible arrangement, then you can literally raise as much or as little as you need in any given month – within the limits of your current accounts receivable.

Business loans, on the other hand, are rigid in nature: you agree an amount of money upfront, for the next one to two years. You get it as a lump sum, then immediately start paying it back in fixed weekly or monthly instalments. If you don’t meet those payments (during quiet or tough times), you will likely incur extra fees, called default charges and rapidly get into difficulties. Even worse, having one loan makes it very difficult to get another before the first is paid off. So, if you suddenly find a new opportunity, you won’t have the cash to pursue it. If you raise a loan on the off chance that something will come up, on the other hand, you will be paying for money you don’t need! This is where Invoice Finance stands head and shoulders above business loans – you draw down what you want when you want, utilise it until your debtors pay your invoices and then recycle over and over.