Avoiding the Christmas/New Year cashflow crunch

Late payment of invoices is a major problem for SMEs in the Australian labour-hire sector, which can even lead to the closure of businesses in extreme cases. At the very least, it creates uneven cashflow, potentially leading to problems paying suppliers and staff, missed opportunities and falling behind in tax payments.

The issue of late payments becomes worse around Christmas and New Year when many businesses shut down or operate on a skeleton staff. For customers waiting for payment, this can create difficulties for them around paying staff and utility bills, for example.

Research from illion for the 2019 June quarter revealed that 25 per cent of Australian SMEs (which it defines as businesses with less than 500 employees) experience problems with late payment of invoices.

How can you protect your business from late payments?

Invoice finance (also known as debtor financing, factoring, cash-flow finance and invoice discounting) is simply a line of credit against the receivables of a business that helps smooth out uneven cashflow. It enables businesses to convert their unpaid invoices to cash by leveraging their accounts receivable, typically one of the largest assets on a business’ balance sheet.

Under the invoice finance process, up to 90 per cent of the value of an outstanding invoice is converted to cash, usually within 24 hours. Once the outstanding invoice is paid, the remaining 10 per cent of the value of the invoice up to a cap of $3 million, less a service fee of around 2 per cent, is paid to the company.

The invoice finance process

There are three main reasons why small business operators should consider invoice finance for cashflow management. Firstly, the finance landscape has changed: there has been a significant tightening of lending standards by the “big four” banks in the wake of the Hayne royal commission and businesses are finding it more difficult to rely on them for financing.

Secondly, as a result of increasingly tighter margins and subdued economic conditions, many businesses have encountered cashflow shortages that have significantly impacted their operations and growth opportunities. And finally, SMEs don’t want to risk personal property to secure finance.

Unlike other forms of credit, invoice finance is based on invoices and does not require personal property such as the family home as security.

An invoice financing facility may also include a sales ledger management service that can issue statements on a regular basis, handle cash allocations, collect outstanding payments and maintain detailed accounts of a business’ transactions. This can help small businesses reduce costs and free up management time to focus on strategic issues and business development.

It’s a good idea to speak to at least a couple of invoice finance providers prior to signing a contract to ensure that partnership is a good fit. Clients should also be prepared to answer questions from potential invoice finance providers such as:

  • What type of business are you in? – Invoice finance providers often prefer to deal with businesses selling a product or service which can easily be shown to have been provided e.g. by a signed delivery note or timesheet.
  • What debtors do you have? – Invoice finance providers will want to understand the quality and spread of a client’s debtors before entering into an arrangement. They will also typically enquire about a business’ bad-debt record, the age of the sales ledger and overall collection performance.
  • How good is your record keeping? – Any provider of invoice finance will want to ensure that invoices can be easily followed through the collection process.

Greg Charlwood, Managing Director, Australian Invoice Finance

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