The business practice of invoice financing is still much of an unknown to many SMEs, despite the many benefits that it can have over more traditional financing methods like overdrafts, loans or credit cards. We sat down with Paul Tonges, Managing Director at inVOICE Finance Group Pty Ltd, to demystify invoice financing for SMEs in the B2B industry.
What is invoice financing and how does it work?
Invoice financing is the financing of your business’s invoices to accelerate your cash flow so that you can pay your staff and other mandatories before you actually get paid by your clients. The process is similar to a bank overdraft, but instead of being secured by your property it is secured by your business’s unpaid invoices.
An overdraft occurs when your business does not have enough money in its bank account to cover a payment, but the bank pays the transaction anyway. Invoice financing is a fast and easy alternative to an overdraft and helps your business’s cash flow with an advance on your unpaid invoices, so you can get on with business.
What are some situations where an SME might choose invoice financing?
- You hve a good long-standing client with a one-off payment problem.
If you have a good long-standing relationship with a client and they normally pay their invoices on time, you might be willing to stretch payment terms to secure the relationship and support your customer who may be having one-off issues with payment timeliness. Invoice financing can help you fill the gap.
- You do not have the option of traditional bank overdraft or loan methods.
Often small businesses may not have the option to get an overdraft, or they do not have the surplus property security to offer the bank. On top of this, if you go to a bank for finance, it can take around 6 to 12 weeks to set everything up which just isn’t fast enough for many business owners to achieve what they want or need now.
- You are a rapidly growing but relatively new business.
In many growing SMES with a higher ratio of business costs to client income, invoice financing is the most suitable financing option to meet the growth curve of that business, compared to a static business with higher incomes and less starting overhead costs.
- You have an imbalance of equity in financing the business.
Sometimes there might be two different directors in a company and there is an imbalance of equity in who is putting up security for that business. The easiest way to achieve balance here is to use the value of your business invoices (debt) rather than personal property to equally manage risk and not over complicate Directors personal contributions.
- Many banks aren’t offering unsecured loans because of COVID-19.
The majority of banks are not doing unsecured loans at the moment which means that invoice financing could be a good solution for anyone who might be wanting an alternative to an unsecured loan. The process of invoice financing also feels a lot less daunting than a bank loan, especially if you just need it for some immediate cash flow.
How quickly can I have cash in hand from an unpaid invoice?
According to Paul, this is one of the most common questions that is asked even before asking about the cost of invoice financing. “We can do it within a few hours if the client has everything together and it’s a perfect transaction,” he said. But for most transactions three or four days would be the norm. Certainly, a lot faster than traditional unsecured bank loans.
You can also get pre-approved for invoice financing before you actually need the money. At inVOICE Finance Group Pty Ltd, Paul says that they can give a funding limit based upon the information they find in their pre-approval analysis, and they can usually do this within an hour too. This means businesses can go to an invoice finance company early and have their invoice financing pre-approved in case they might need to use it down the track.
Invoice financing may be a good option for many dynamic, fast-moving businesses in the current climate, which for many sectors is booming, but keep in mind that the onus is still on the creditor to repay the invoice in a timely manner AND collect the account from their own customer. The wider the gap between the two could eat into your project or product margins.
We thank Paul and the inVoice Finance Group Pty Ltd team for helping to crack the code on this type of finance. Optimum Recoveries work with all different types of businesses to improve cash flow and implement debt management solutions, and invoice financing might be a solution that can help your business in this area.
If you would like to get in contact with Paul to discuss invoice financing for your business you can email him directly at email@example.com or give his team a call on (07) 3488 2592.
Optimum Recoveries provide debt prevention, management and recovery services for a range of businesses. If you’d like to learn more about how we can help your business, fill out our enquiry form here or contact us on (07) 3166 8888.