Is your business facing a cash flow crunch because your clients are delaying payments?
Or have you recently secured new contracts and/or new clients, and need funding for growth?
Or has Covid-19 resulted in reduced revenue for your business and you need upfront cash to meet current and ongoing expenses?
If any of the above statements sound relevant, then this article is for you.
With over two-thirds of all Australian businesses already reporting a significant reduction in cash flow due to lock-down measures and other restrictions, you’re certainly not alone. Perhaps even more concerning is the dire outlook, with almost 90% of respondents expecting increasing ramifications over the next few months.
Even for those businesses that are lucky enough to have not been affected by COVID-19 and are in fact winning new business and continue to expand/grow, it is more important than ever to ensure you have ongoing access to cash to meet the increased operating expenses that come with growth, whilst the opportunity exists.
This unprecedented situation that we are living through, including social distancing and trading restrictions, has spared few, hitting key industries such as wholesale trade, retail, travel, hospitality and manufacturing particularly hard. As the health crisis threatens to morph into a massive economic slowdown, the Australian Government has announced substantial stimulus measures to support businesses, employees and families over the next six months. Unfortunately, even with the $130 billion JobKeeper program about to kick in, it’s evident that many businesses are facing a cash flow crunch, deferring supplier or creditor payments to preserve critical working capital.
In response to this, the Government has signed new legislation that provides a legal reprieve for businesses unable to make outstanding payments as they fall due, for the next six months. Creditors can no longer send a statutory demand to offending debtors for amounts up to $20,000. Furthermore, businesses with debts over that amount now have six months to respond (previously 21 days) to issued legal notices.
The flow-on effects are immense and have already resulted in an expanding cycle of delayed payments. As businesses postpone payments to their wholesale suppliers, these suppliers find themselves facing a cash flow crunch as they still need to pay their contractors, employees and so forth. The sequence is further exacerbated by an inability to pursue further legal action.
Does this scenario sound familiar to you? If you are experiencing pressure on your cash flow and working capital stemming from delayed payments, then you are certainly not alone. With thousands of businesses across Australia facing this exact issue, it is crucial to know that the situation is not all doom and gloom.
What if you could get the money tied up in unpaid invoices paid upfront?
What if you could receive these funds within 24 – 48 hours, instead of waiting for your clients to pay when they get a chance?
Would that solve your cash flow problems?
Will that provide you the cash to not only cover your operating expenses but also to buy raw materials/stock required to power the growth of your business?
Sounds too good to be true? Well, it isn’t!
It is possible with invoice financing. Invoice finance, also known as accounts receivable financing or debtor finance, is a fantastic solution for small to medium businesses (SMEs) looking to shorten their working capital cycle and access their cash sooner.
As the current COVID-19 crisis bites, many businesses are waiting up to 90 days for customers to pay and, in many cases, even longer to receive payment. Invoice finance solves this cash flow problem by advancing funds on outstanding invoices within as little as 24 hours of approval.
If you are a wholesaler, manufacturer, transport and logistics business or any other business that supplies goods and services to other companies, then your funds will often be tied up somewhere in your working capital cycle. Invoice finance is the key to unlocking this capital, without taking out a loan or going into debt, allowing you to purchase more materials, pay for manufacturing inputs or even to pay for stock as a wholesaler, in order to continue to expand your operations.
Will it work for my business?
Yes! If your business satisfies the following criteria, invoice finance might be an excellent option for your business:
- Your customers are other businesses (B2B)
- You have more than one customer
- You issue invoices to regular customers with payment terms
- Your business has an annual revenue of at least $1 million
- You are looking for a facility size of at least $100,000
If you have already gone down the path of trying to get a loan or an overdraft and have either been turned down or the amount offered to you has been too little, then provided you meet the above criteria, you may still qualify for invoice financing as it’s based on your current sales, not your past turnover or your profitability.
How does it all work?
Invoice financiers will pay you up to 90% of your verified outstanding invoice value upfront. When your customer pays, they will remit the remaining 10% minus a small fee to compensate for early funding.
As the global market continues to grow, more business owners are choosing invoice finance to improve their cash flow cycle, as opposed to more complex loan products, such as unsecured business loans or commercial finance solutions. With invoice finance, because it’s not a loan (you are simply being paid your cash upfront), you are not charged principal and interest, regardless of whether or not the business can afford it. With invoice finance you are only charged as and when you use it, and usually at a far lower cost than a non-bank loan.
It only takes around 2 to 4 business days from your invoice finance application to become an approved, active customer. All you will need to do is upload your invoices into your provider’s system to start receiving your funds on the same day they’re verified.
With a quick, online application process and money available within 24 hours of approval, the advantages of invoice finance are clear.
It is important to also note that invoice finance does not take over your collections and get in the middle of you and your customers (that is factoring), you are still 100% in control of your business and your relationships with your customers.
Shouldn’t I just get a business loan instead?
Invoice finance carries many advantages over business loans. As a revolving facility with no fixed repayment period, you have the flexibility to draw down and use the facility only as demanded by your cash flow requirements.
There are no fixed fees such as upfront, principal or interest charges that you would usually expect from a traditional business loan. With invoice finance, you get your cash straight away with no upfront costs. Fees are only charged when an invoice is paid by a customer, equal to a relatively small percentage of the invoice value. Consider this fee to be commensurate to an early settlement discount that you may otherwise offer your customer.
Compared to an unsecured business loan, which typically carries an interest rate well above 10% (when converting to an APR – Annualised Interest Rate equivalent), invoice finance generally is a cheaper option that leverages the security of your receivables asset base to shorten your working capital cycle.
With the TIM Finance funding solutions, we also include a form of trade credit insurance as an additional layer of protection. If your customer defaults on their payments, TIMSecure™ protects you by covering up to 90% of the invoice value funding as well as the legal costs to chase your client (debtor). This is unlike business loans where you run the risk of losing your business as well as personal assets in the event of you defaulting on your loan.
Will my clients come to know I am using Invoice Finance?
While your customers will know that you are receiving funding against their invoices (as they will be asked to verify/confirm your invoices), invoice finance has become an accepted part of the trading process. With thousands of Australian businesses switching to invoice financing each year, driving nearly $40 billion in annual turnover in 2018 (Debtor and Invoice Finance Association) your debtor has more than likely encountered it before – perhaps they even use it themselves.
TIM Finance does also offer what is called undisclosed invoice financing whereby the debtors wont specifically know about the funding solution in place, but in order to qualify for this your business will need to be well established for over 5 years; doing >$10 million in annual revenue; have no other debt and have a strong balance sheet.
Invoice financing is often confused with invoice factoring. While they are similar in that they provide forward funding based on unpaid customer invoices, they are fundamentally different products. Invoice finance, unlike factoring, does not involve the collection of outstanding invoices or taking over communications with your customers. Invoice finance is a non-invasive financing product that allows you to continue running your business and managing customer relationships as you normally would. Factoring is mainly utilised for distressed businesses and for those businesses that simply do not have the collection back-office capabilities.
Will my customers or creditors think I am in financial trouble?
Invoice finance is NOT a sign to your customers that you are doing it tough. In fact, invoice financing arrangements are increasingly common and viewed favourably by your large customers, as they have the assurance that your business has access to the cash you’ll need to continue purchasing stock and raw materials to meet your customer’s supply demands. Growing businesses use invoice finance to fund their expanding operations, not as a last resort to maintain solvency.
The old notion of “my debtor will think I am weak and won’t want to deal with me” is 1970’s old school thinking, and false. In fact, in USA and the UK large global corporations use invoice financing themselves to access upfront cash – the more cash in “the system” the quicker these businesses can also grow, and invoice finance solves this, with ease.
Similarly, creditors will be assured you have the cash to meet your commitments (should they ask you), as opposed to waiting for your customers to pay when they feel like it. This assurance is particularly important in the current environment, as the chance of delayed payments are beginning to worry all businesses throughout the supply chain.
Why Aren’t More Businesses Using It – Is Invoice Financing Australia’s Best-Kept Cash Flow Secret?
The use of invoice financing as an effective business funding solution is growing year on year around the globe. While increasing at above-system rates, invoice finance has not penetrated the Australian business funding market as heavily as it has in Europe or the USA. Invoice financing accounts for about 4 per cent of Australia’s GDP, compared to over 19 per cent in the UK. Official data from UK Finance shows that the UK facilitates more than $45 billion in drawn invoice finance and asset-based lending at any one time. This data suggests Australia still views invoice financing as a niche or specialist business funding option, whilst the UK (including their big banks) considers it to be a very popular and well-understood solution, across the board for both SMEs and large corporates.
If the 2018 Review from the FCI (International Body for Financing Trade Receivables) is anything to go by, this relatively low uptake of invoice financing in Australia is primarily due to a lack of “awareness and acceptance.” As more financiers, including banks, increase their understanding and willingness to fund SMEs through alternative methods, the uptake of invoice finance will undoubtedly continue its upward trajectory.
As we can see from its international popularity, the idea that using invoice finance can be detrimental to your business is simply not accurate. Invoice financing is certainly not an indicator of a weak or failing business. Smart leaders understand that invoice finance is a useful and practical funding mechanism to shorten their working capital cycle, improve business efficiency, cost-effectiveness, supporting growth opportunities and their ability to meet customer demands.
How to Choose an Invoice Finance Provider
If you think invoice finance could be a great solution for your business, it is time to look at individual providers. When choosing a provider, consider their ability to service businesses of your size, location and industry. Once you have established this, make sure you ask the following questions:
How flexible is their service? If you are a growing business, your facility needs flexibility. Can they scale up the facility as your business grows? Make sure they are willing to work with your business and different scenarios you might encounter.
What are their fees, is there anything hidden? Some invoice finance providers will try to charge extra fees for services that are vital to the package they offer. These costs can add up, so make sure to be clear on what the facility is going to cost you. Providers such as TIM Finance carry no hidden fees.
How will they interact with my customers? Invoice financiers will need to run checks on your customers and occasionally contact them to verify submitted invoices. Most of the time this is done professionally, and it is rarely a problem for your clients. Check how they work; do they get heavy handed – are there any negative reviews online?
Let us say a customer fails to pay – what happens? Look in depth into how your financier treats your overdue invoices – is it recourse or non-recourse? If you’re on the hook, consider whether there is any ability to “swap out” the invoice with a newer one, is there suitable trade insurance in place as part of the deal or choose a provider like TIM Finance that offers trade credit insurance an integral part of their solutions.
How easy is it to use? Flexible finance should be easy and fast. Your provider should have a smooth online real-time portal backed by a fast invoice approval system, that reflects your funding availability without the need to have to call or email for regular updates. Ask about how their interfaces work and how long it takes funding to hit your bank account.
TIM Finance is a trusted, leading invoice finance provider with its head office located in Sydney, Australia, supporting and funding businesses countrywide. Over the last six and half years, we’ve funded over $850 million to over 400 Australian businesses. With a 4.9/5 Trustpilot rating, our happy customers trust us to provide smart, straightforward invoice finance solutions across many industries, including wholesale trade (food and non-food), manufacturing, labour hire, transport and business services.
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This is Loren. She doesn’t work for us, but we’ve done a lot of business together. Loren is one of the many trusted business consultants who consistently recommend TIM to their clients. Watch the video below to find out why.
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TIM Finance offers several different funding solutions (Services), one or more of which has a no-fee, no interest and 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 it’s appropriateness to these factors before acting on it. Read the funding agreements provided, for your selected product/service, including all the Terms and Conditions contained in agreements provided, before proceeding. *T&Cs: Minimum 12 month invoice funding contract with TIM Finance. 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.