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?
• 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?
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
• 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
• 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?
Here’s an example:
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.
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.