Are you in need for a quick cash injection?
Access money owed to you quickly through invoice financing.
When clients are slow to pay invoices and cash is needed immediately, invoice financing can be a great, affordable option when compared to taking out a loan. Use your invoices to access cash owed to you quicker.
Essentially, businesses can use their invoices as collateral for quick to immediate financing. There are many forms of invoice financing depending on the lender. However, the two most common types of finance are invoice factoring and invoice discounting (or variations of them).
Invoice Factoring and How It Works?
You sell your unpaid invoices to a third party who then takes responsibility for collecting the outstanding funds. The process works like the below:
1. Invoice your customers as usual
2. You then sell these invoices to the lender/factor
3. The lender/factor then gives you a percentage of the invoice (typically around 80%)
4. Your customers pay the lender/factor when the invoice is due
5. The lender/factor sends you the remaining cash, less their fees.
Invoice Discounting and How It Works?
Slightly different to invoice factoring, with discounting you do not sell your invoices to a third party and are responsible for collecting the money. Below is how it works:
1. Invoice your customers
2. Provide copies of the invoices to the lender who will decide on the amount to lend
3. The lender will then advance a percentage of the invoice amount to you
4. Your customers pay you when the invoice is due
5. You then pay the lender the amount they advanced you plus their fees
Comparing the two types of invoice financing
The main differences between the two options come down to invoice ownership and client relationships. With factoring you are selling your invoices and the third parties collection practices may be different to yours. With discounting you maintain ownership of the invoices and the relationship with your clients in terms of how you collect money from them.
Advantages of Invoice Financing
- Quick access to cash owed to you
- Depending on the option used, you are outsourcing your collections which can save you time
- You are not on the same fixed type of terms of borrowing
- As your invoices are collateral, your credit score is not a potential barrier for approval. You can also avoid the higher costs of borrowing with a poor credit score.
- Can be easier to access than traditional loans
Disadvantages of Invoice Financing
- Most lenders won’t approve old invoices
- You don’t receive the full amount of your invoice
- Some customers may not like dealing with a third party if discounting is used
- Collection isn’t guaranteed meaning you may be responsible for unpaid invoices
- There can be other cheaper finance options available for handling cashflow problems, such as a line of credit (if you qualify)
- Repayment terms are roughly tied to the invoice due dates (not extended over a longer period like a loan)
- Funding size is capped at a percentage of the overall invoice total
What industries is invoice finance suitable for?
Invoice finance is suitable for most industries or any business that issues invoices. It is a great financial tool to be used with other finance options based on situation or strategy. For quick market changes that requires speed and flexibility, invoice financing is a great option.
Construction Industry – getting funds in advance can assist with paying contractors, purchasing materials, or hiring staff to keep jobs moving along.
Logistic and Transport Industry – whether it’s one of jobs or immediate jobs, funds might not always be available. Being able to get an advance on your invoices to pay for these types of situations is important.
Manufacturing Industry – With high maintenance costs, cyclical business, and wages, having access to flexible and quick finance is often a must in manufacturing.
Wholesale, Retail & Distribution Industries – Long credit terms up to 120 days or more can create difficult cashflow situations. Invoice finance can be a great tool to open up funds for growth and sustainability.
Professional Services Industry – Cashflow can be a challenge with extended credit terms. Operating costs come in like clockwork with 30-day terms. For those providing terms to clients beyond that, cashflow can become an issue.
Alternative Funding Options to Invoice Financing
Different circumstances may require a different type of lending solution. Whilst invoice financing can be great short-term cashflow boost, it may not be the best choice. In certain situations, more cash may be needed and be repaid over a longer period.
If you need a larger amount of cash with longer terms, there are many other funding options available. Quickly go over different loan types to see what works best for you – A line of credit, unsecure loans, secure loans etc. Review business loan options here.
Invoice Finance For ABN Holders
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Applying For Invoice Financing
People also asked
What is invoice financing?
Invoice financing is a financial solution that allows you to access the money owed to you through your invoices quicker. Basically a third party will lend you money immediately using your invoices as collateral along with a fee.
Is invoice financing expensive, what are the costs for this solution?
Each lender or factor will have its own criteria for fees. In general, the fee or cost associated with this service is generally determined by the total value of the invoice and not just the amount advanced. Lenders charge a percentage of the amount combined with length of the advance 30 days, 60 days, 90 days etc.
Can I qualify for invoice finance if I have bad credit?
The short answer is yes, because you are using your invoices as collateral, your credit history will not have the same type of impact as applying for a loan.
How fast is invoice financing?
Once approved, funding can be provided within 24 hours. The overall process of applying and being approved is very quick. Most lenders have digital processes which allow you to upload invoices and your application within minutes.
Do I have to have security like my home to get approved?
Most lenders will use the invoices as collateral and do not require your home or other type of security.
Who can use invoice finance?
Most business that invoice customers can use invoice finance. The more turnover the better with some lenders requiring around $50,000 a year to qualify.
Do banks provide invoice financing?
Yes, many banks and specialist lenders provide invoice financing. Different lenders will have different types of invoice financing products. Speaking to a broker is a good way to understand who provides what and what may be the best solution for your needs.