Poor cashflow is one of the main reasons for business underperformance and failure.
For small- and medium-sized businesses, the real key to success is maintaining a strong flow of cash through the business.
However, many firms struggle when required to make large capital outlays to suppliers who demand fast payment and then wait between 30 and 90 days before receiving payment from clients.
This problem is exaggerated by the inflexibility of the banks in providing higher levels of funding to firms with inadequate personal property, low fixed asset bases, insufficient trading history or trading performance issues.
However, times have changed from the days when the bank was the first port of call for funding, particularly for SMEs. The role of the overdraft, which is based on how a firm has performed historically on the value of the underlying security, is being reconsidered as new more flexible forms of finance have emerged.
One such alternative is invoice finance, also known as debtor finance and receivables finance.
So why is invoice finance becoming the preferred finance option for an increasing number of Australian entrepreneurs? The following five facts will answer that.
1. Invoice finance is a far more flexible form of finance
Invoice finance provides a flexible source of finance by allowing businesses to unlock the funds tied up in unpaid invoices – leading to an immediate injection of cash.
The amount of funding available is based on the sales you make not on the value of your historic balance sheets. Not only that but if your firm is doing well, then the amount of funding available increases because it is linked to your sales.
This is also referred to as discounting, though invoice finance offers an added service to collect and administer the debt.
To qualify, clients need only to trade on credit terms, and generally are manufacturers, wholesaler or supply services to other business such as, but not limited to, printing, recruitment and transport.
On receipt of an invoice from a client, a factor will pay 75–85% of its value within 24 to 48 hours. The factor then carries out the credit control on each invoice, sending out statements and chasing payment until it is paid, all on behalf of the client.
The remaining balance percentage, less a service fee, is returned to client, once payment is received. Another great advantage of invoice finance is the flexibility.
2. Cashflow, late payment & a lack of confidence hinder business growth
Cashflow is a huge problem for many companies. As an example, when you have to pay your temporary workers weekly, long before you can even invoice your clients, cashflow problems are bound to follow.
Added to this, businesses now have to pay GST and other taxes monthly or quarterly.
When the twin problems of cashflow and late payment converge, it is no wonder that many firms are looking towards alternative funding solutions like invoice finance to help keep their business moving forward.
Without strong, reliable cashflow, a business owner will lack the confidence to invest further or to pursue new strategies which will help grow the business. In many cases, the directors’ personal assets will also be at risk if used as security, which might further undermine confidence needed to make needed changes.
3. More institutions are offering invoice finance
According to the Debtor & Invoice Finance Association’s statistics, total turnover for the latest 12 months to March 2013 was over $63 billion.
Some banks and high-profile finance companies offer discounting and there are a number of nonbank financiers who provide the additional invoice finance service as well as a number of additional services for SMEs.
4. Invoice finance offers value for money
Compared to bank funds, the cost of money advanced through invoice finance is highly competitive.
What is often forgotten in a straight comparison of charges is that invoice finance includes a full sales-ledger management service.
This also means that users of invoice finance can make significant related savings, not only by removing the burden of chasing payment but also the savings in terms of stationery and telephone calls etc.
What’s more, the time owners often spend on these tasks can be released back into the business.
Businesses can also enjoy the benefit of reducing late payments, and further savings can be made with suppliers by taking advantage of early-payment discounts, and also reducing or doing away with early-settlement discounts in full, to offset the cost of the facility.
5. Invoice financiers work alongside their clients
Some business owners may be concerned that the establishment of a relationship with an invoice financier will cause alarm among their customers, who might interpret this as a sign that they are in financial difficulties.
This is something of a hangover from old times. With a reputable, established invoice financier, the client benefits from having a dedicated credit controller who, in effect, becomes an extension of the client’s team. The financier works with the client to manage the sales ledger – chasing invoices and taking on the responsibility of collecting payments.
A good working relationship with a client’s customers is just as important to the factor as it is to their client. Invoice financiers are more than aware of the importance of good client relationships. It is not in their interests to upset any relationships.
The fact that the two have this interest in common means that the invoice financier has to work closely with the client to fully understand the situation, their business and their customers.
Mark Cleaver, Managing Director, Bibby Financial Services Australia & New Zealand
