Operating a small to medium sized business (SME) comes with its own, unique set of difficulties. Among the most pronounced of these difficulties is the issue of cashflow. A business can only grow based on the amount of cashflow it has to expand or increase products and/or services. With so many customers, especially other businesses opting to pay with credit, the cashflow for an SME can be hampered waiting on these payments.
What options does this leave an SME for growth? You could opt to accept only cash payments, but this will limit your customer base. An easier option is debtor, or invoice finance. Invoice finance is a growing market, over the last 15 years SMEs have become more aware of the benefits to their growth that invoice financing offers.
What is Invoice Financing?
Invoice financing is a loan against outstanding invoices. Your company provides a good or service to a customer, setting up credit terms, usually with a 30 or 60 day payment option. This leaves you waiting on the cashflow necessary to the growth of the business. You know you will either receive payments throughout this period, or you will receive the lump sum at the end of the term period, but until then you need options. Invoice financing gives you the needed option.
Your company can use these outstanding invoices to receive a loan against the money owed. This option allows you to borrow a percentage of the invoice amount, up to 85%, for ready access to the money owed you. Once the invoice has been paid in full, the financier will release the remaining balance, minus fees. This allows your company to continue growing, and as sales increase, the amount of money you can borrow increases.
Invoice financing does not mean the company is accruing more debt. The company is merely gaining more immediate access to money already owed them. This acts as a line of credit against outstanding invoices, the money is yours, and with invoice financing, you don’t have to wait for it. In fact, according to the Debtor and Invoice Financing Association of Australia (DIFA), this option provides up to $7 billion in credit lines for Australian based SMEs.
How Does Invoice Financing work?
The process for invoice financing is very simple, allowing your company ready access to funds without the hassle of chasing down debtors. Once you have set up terms with your financier, the process works in four easy steps:
- Your company provides the goods or services to the customer, setting up the desired credit plan.
- An invoice is submitted to the customer outlining the credit plan, with a copy also being submitted to the financier.
- A percentage of the invoice value, up to 85%, is made available to your company within 48 hours of receipt of the invoice.
- Once the invoice has been paid in full by the customer, the remaining balance, minus fees, is turned over to the company.
As the business grows, thanks to the increased cashflow, the levels of available funding increases. The best part, the money belongs to your company, meaning you are not increasing the company’s debt. You choose the invoices that will be used for the loan, based on your company’s chosen qualifications and the monetary needs. These invoices are looked on as assets to the company, being used against the loan.
Invoice Finance Options
There are two basic forms invoice, or debtor financing takes.
The factoring option involves the financier purchasing the invoice from the business. This means all payments by the customer are made to the financier, and the customer is fully aware of third-party involvement. This option takes all collection involvement out of the hands of the company borrowing money.
Discounting options involve a company borrowing a percentage against the invoice. The company still receives the payments from their customers, which they turn over to the financier towards the invoice. The customer may not be aware of third-party involvement in this arrangement.
Benefits of Invoice financing
There are numerous benefits for SMEs when using invoice financing. These benefits include:
- Availability of cash, up to 85% of the invoice value, within 48 hours.
- Increase in overall funding and growth within a company.
- No real estate or other asset security needed against the loan as the invoice is seen as the available asset.
- No debt accrual.
- Improved settlement discounts with creditors due to increased cashflow.
- Less time spent dealing with collections and gives collections over to experienced hands.
- Available finance options increase as the sales and overall business grows.
invoice financing, in many ways, levels the playing field for SMEs. This is a low-risk method to increase sales, grow your business, and become a market competitor.
Qualifications for Invoice Finance
Invoice financing is primarily helpful for small to medium sized businesses offering sales of products or services in a business-to-business setting where traditional, 30 or 60 day, credit terms are offered. Of those that qualify under these terms, the businesses that benefit most include:
- Start-up or small businesses that do not have credit built up
- Businesses recovering from market downfall or other financial situations
- Businesses seeking to re-finance or restructure to increase growth or secure property
The industries that benefit the most include:
- Wholesale
- Business services
- Manufacturing
- Transport
- Printers
This is a small sampling of those that can gain benefit from invoice financing. The most important qualification is the use of credit terms within the business. The invoices used in business-to-business deals are a company’s biggest asset when it comes to income financing. This is a type of loan that analyses a company’s prospects.
How to Apply for Invoice Financing
Before you apply for financing, you will want to check out the terms and conditions involved for each company. These terms, such as fees paid for services will vary for each lending company and based on the conditions of your business, such as:
- Payment history of your customers
- Your company’s business model
- Payment terms provided to customers
- Number of invoices used towards a credit line
Once you have determined your options, the application process is simple. Once you have completed the application, most likely done online, you will need to provide the following documentation.
- Forms of ID
- Accounts Receivable forms, showing customer payment history
- A list of customers
- Copies of the invoices that will be used towards the loan
Once you have turned in the application and all necessary documentation, the process usually takes 3-5 business days to complete. Keep in mind that the financier may also need access to your accounting system to complete the loan.
Tips for Qualifying Invoices
While invoice financing is a low-risk option, there are always dangers involved in taking out a loan. To ensure you get the most out of your financing, there are some guidelines you can use when determining which invoices to use towards your loan.
- Make sure you choose customers who regularly pay their invoices on time.
- Avoid including new customers if possible. You want to make sure you have an established relationship with the customers whose invoices are being used.
- The larger the invoice amount, the more money you can receive towards that invoice.
- The larger the volume of invoices used, the more money you can receive.
- Try to choose the invoices with the shortest term options. Fees for invoice financing vary depending on the credit terms.
Always make sure you are aware of the fee terms for your financing option. This will help you determine which invoices to include.
Invoice Financing FAQs
Deciding on a loan option is an important decision for any business. Let’s look at the most common questions about invoice financing to help you make sure this is the best option for you.
What do I need to take into account before applying for inventory finance?
As with any financial contract, there are always aspects to consider before making a financial commitment. In relation to inventory finance, some points to think about before applying include thinking about aspects of your inventory. Asking yourself how fast you usually move your merchandise can help determine if this is a good financing option for you as stock that takes a long to time sell may not appeal to many lenders.
How long do I have to wait before the money becomes available?
The initial application process takes 3-5 business days. Once you have qualified, the money is available within 48 hours from the time you submit an invoice.
Will assets be needed to set up against the loan?
This loan is based on outstanding payments due on invoices. The only asset required is the invoice itself showing the money due.
My company is a start-up business, so we do not have any line of credit open or any long-term financial statements. Will this be a problem in receiving invoice financing?
No. Invoice financing is based on the credit of your customers. If you have invoices available to submit, you have all the assets you need to apply for this type of loan.
What fees am I required to pay to receive this type of loan?
Fees will vary depending on the credit of your customers, the volume of invoices, and the terms available. You will need to contact your financier to determine what your obligations will be.