Accounts receivable financing Australia

Accounts receivables finance, also known as invoice finance or factoring, is designed to help businesses receive early payment of their outstanding invoices.   This kind of finance can be particularly useful for growing SMEs who need a flexible finance solution, as well as businesses who have experienced problems accessing traditional lines of credit.  The main benefit of leveraging the invoices of a business is that as the funds are yours (rather than being a loan), you are simply accessing your own money faster.

What is accounts receivables financing?

Accounts receivables finance is one of the oldest forms of finance in existence.  Put simply, the process involves the selling of receivables (your invoices) to a third-party Financier (sometimes called a ‘Factor’), the third party then takes over, assuming all risk on your receivables and pays your invoices straight away (less their fee).  This gives your business an injection of cash as soon as you issue your invoices – creating certainty around cashflow as well as greater business efficiency and planning capabilities.

While invoice finance, factoring, and invoice discounting are all variations on the same theme, there are some differences to be aware of:

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 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%.

Of the three accounts receivables finance options listed above, in general, ‘selective invoice finance’ is often favoured by SMEs because;

It is not a loan – the third-party Financier is essentially the ‘back of house’ and therefore has no impact in the outstanding loans of creditworthiness of the business

Choice – rather than selling their entire accounts receivables ledger, the business chooses which invoices they would like to have paid early (keeping a close eye on cashflow gains and funding costs)

Flexibility – the facility is ‘at call’ meaning the business may only use it when they need to, an excellent option for businesses needing to cover a spike in demand

Multiple funding sources – businesses have the opportunity to incorporate multiple funders reducing the risk (and constraints) of dealing with a single funding partner.

Is accounts receivables finance right for you?

For many small businesses in Australia, traditional finance options such as bank loans can be inadequate, add more risk via the attachment of personal assets, or simply be out of reach.  Many SMEs walk a very tenuous line, keeping up with overheads, staffing costs etc. while waiting for their invoices to be paid.  For many, the key source of anxiety for them is cashflow instability, impacting not only their day to day operations but also their opportunities to grow.

Typically, accounts receivables finance is a great solution for businesses providing goods or services to high credit customers and those that experience long lead times between starting the project (including upfront purchasing and hire costs) and issuing the final invoice. Industries such as infrastructure, transport, manufacturing, wholesale, supermarkets and government are good examples where factoring can be a useful tool for SMEs.

While the use of invoice finance in Australia and New Zealand as an effective business funding solution is growing, we are still some way behind other countries.  For example, invoice finance accounts for about 4% of Australia’s GDP, compared to over 19% in the UK.  We are however seeing a consistent upward trajectory in Australia as awareness around non-traditional, more flexible funding sources increases. 

What’s the difference between factoring and accounts receivable financing?

Lending models such as factoring, or invoice discounting mean a third party takes on the role of managing the entire accounts receivables ledger of a business, effectively taking over the ownership of the invoices and chasing payments.

Accounts receivable finance is slightly different, as the relationship with the third-party financier is not necessarily divulged to your clients. The financier will advance a percentage of the face value of an invoice, speeding up payment times, but does not take ownership of the invoices (accounts receivables management remains with you).

Let’s take a look at the pros and cons of accounts receivables finance

As with any business finance option, it’s important to weigh up the positives as well as the negatives to decide if it’s right for you.

Pros:

No collateral – this form of finance does not require personal assets or guarantors

Control – you retain control of your business, you do not need to disclose the relationship to your customers

Cons:

Cost – the quicker access to cash has a cost attached (one that may be offset against the value of having funds back into your business sooner)

Contracts – contracts can be long term (often 24 months), some may also have fees associated so make sure you look at all providers to get the right deal for your business. 

Is it worth it?

When looking at the cost of invoice finance or factoring fees, it is important to remember that a dollar back today is worth more than the dollar you get tomorrow. By getting funds back faster, businesses can reinvest those funds at their gross profit margin. Compound this month on month and it’s easy to see that the funding cost of invoice finance can easily be offset by the value of faster payments.

Here’s an example:

An Australian food producer won a contract with a major grocery chain. This was a huge boon for them, they moved premises, hired more staff and purchased new equipment to ensure they could meet demand.

However, cashflow issues quickly arose as the business regularly waited anything from 60 to 90 days for their invoices to be paid. Being a small player, they were unable to negotiate better payment terms with their large client and had to look for short term finance to fill the gap.

Unfortunately, their first port of call (their bank) saw them as high risk and wouldn’t grant them a further business loan. The solution was accounts receivables finance. Their Financier was immediately able to see that the grocery chain was a low risk debtor (they were just slow at processing invoices) and was able to fund the food producer’s invoices straight away, giving them access to much needed cash and effectively stopping the bottle neck. The food producer was able to go on fulfilling orders and meeting their obligations – they we also in a stronger position to negotiate better payment terms when their contract was evaluated.

Thankfully there is a wealth of finance options available for SMEs today, with the non-bank lending landscape growing year on year as businesses look outside the constraints of traditional avenues for funding.

Cash remains key to the success of any business and a product that leverages invoices is a great way to stabilise cashflow, meet operational costs and plan for growth – all without taking on further debt.

Click here to find out more about ‘Selective Invoice Finance’ and Apricity.

Apricity Finance – Who Are We?

Founded by a team of experienced investment management and finance professionals, our first office opened in New South Wales’ Southern Highlands in 2013. In 2016, we opened offices in Sydney, Brisbane, Melbourne and Auckland. Our goal is to become the leading provider of invoice finance in Australia, without losing our personal touch. Great relationships are at the core of our business. All of our clients are safe in the knowledge that their needs are our first priority and they have access to the decision-makers at any time.
Find out more about the types of Invoice Finance available