As many businesses plan for recovery, access to finance and cashflow are likely to top of mind. Traditional bank finance is difficult for many businesses to secure, meaning many business owners are worried about how they can fund their growth. For many in this situation, invoice finance is becoming a “go to” solution. An invoice finance facility gives businesses faster access to funds from their own invoices. However, to make an informed decision about whether invoice finance is right for your business, here are five things you should know about invoice finance.
1. Not all invoice finance is equal
The terms “factoring”, “invoice discounting” and “supply chain finance” are more or less used interchangeably. However, there are some distinct differences:
- Selective invoice finance: businesses have the flexibility to choose which invoices to fund, when and at what percentage (within prescribed limits).
- Factoring: in general, the financier (or lender) will manage the entire debtor ledger of a business, including chasing payments.
- Invoice discounting: the financier will advance a percentage of the face value of an invoice, often around 80 per cent.
2. Time value of money consideration
Invoice finance allows businesses to get money back into their business faster, giving them the ability to reinvest those funds at their gross profit margin. Put simply, a dollar today is worth more than the dollar you get tomorrow. This must be taken into account when measuring the cost of the facility against the value to your business.
3. Flexibility and transparency = certainty
We think that for invoice finance to be of greatest benefit to a business, it needs to be a flexible “at call” solution. Businesses should be able to choose when they use it and when they don’t – without incurring penalties.
4. Help in times of growth
A business experiencing rapid growth often runs into cashflow issues. There may be a need to hire more staff or buy new machinery, but the business has exhausted their lines of credit, already mortgaged their house or built up an ATO debt. Invoice finance can be a great solution here, whether as a means of injecting cash back into the business quickly or as a way of clearing existing debts to pave the way for further finance. Importantly, the business can take advantage of new opportunities without taking on unnecessary debt.
5. Understand the contract including facility limits
Before you sign anything, make sure you understand the contract. Look for any account keeping and facility fees that could impact cost. Understand how late payments and concentration can affect the facility limit. Facility limits are usually set based on the value of the business’ receivables ledger. However, if invoices are late or concentration limits are imposed (because the ledger becomes skewed heavily to one client or industry), most lenders will change that limit meaning the business may have access to fewer funds.
Like to know more? Visit https://www.apricityfinance.com/inside or call us on 1300 227 424 to find out whether invoice finance is right for your business.
Brought to you by Linden Toll, CEO, Apricity Finance