According to Stuff.co.nz, Kiwi companies borrow about $1b against their invoices annually, compared with a figure of $78b in Australia. Invoice finance volumes are slowly growing in New Zealand however compared to our Australian counterparts, this business finance option is still largely under utilised.
With COVID-19 seeing big companies extend their already long payment terms, it is expected that more small businesses will turn to alternative finance options like invoice finance as they struggle staying on top of their cash flow. More SMEs could be reaping the benefits that invoice finance provides, including greater flexibility, reliability and simplicity.
When considering your invoice finance options, it is easy to become confused. Invoice finance can also be referred to as debtor finance, invoice factoring, invoice discounting, cash flow finance and accounts receivable finance, and while these products work on the same principle (leveraging invoices to get funds back into the business sooner) there are some important differences that businesses should be aware of.
With so many terms to choose from, it’s understandable that there are many misconceptions around invoice finance. Below, we dispel some of these common misconceptions related to invoice finance.
1. INVOICE FINANCE IS EXPENSIVE
One of the most common misconceptions about invoice finance is that it’s expensive, when in fact it can often be more cost effective than other types of finance such as loans and overdrafts. This comes down to the short term nature of the funding. People often associate that something so flexible must come at a cost, but this is not the case.
It all comes down to the size of the invoices being funded. Banks will sometimes provide up to 80% of your outstanding invoice amounts, depending on your company’s overall debt levels. Most other factoring businesses will only pay around 80-85% of invoice value – often less. At Apricity Finance, we finance up to 95% of the value of approved invoices, our interest fees are deducted from the 5% held back.
2. I’LL HAVE TO FINANCE MY WHOLE LEDGER
There are some invoice finance facilities that will require you to finance your whole ledger, however there are also some boutique financiers who will fund individual invoices – this is known as selective invoice finance. For some businesses, full ledger factoring can be a great option however this service doesn’t always fit the needs of small businesses. Some businesses are simply too small for a full ledger facility service, and can’t justify outsourcing every invoice they issue. With selective invoice finance, businesses have the freedom to choose when and which invoices they wish to fund.
It’s important for businesses to do their research and find the right invoice finance facility for them. Apricity Finance is a selective invoice finance facility that allows businesses to choose which invoices to fund, at what time and what percentage. Once your invoices are approved, it’s totally up to you.
3. THERE WILL BE LENGTHY, LOCK IN CONTRACTS
Similarly to misconception two, some invoice finance businesses will require their clients to sign lengthy, lock-in contracts. This is often the case when it comes to financing the whole ledger. Businesses are strongly encouraged to seek professional advice on any agreements before signing, to ensure the service is right for them.
While some competitors have restrictive contracts for their clients, we are proud to have no lock-in contracts. Once you become an approved Apricity Finance customer, you can choose when to use us, which invoices and what percentage to fund (up to 95%).
4. INVOICE FINANCE REQUIRES ASSETS AS SECURITY
For many finance options, businesses have to offer some form of assets as collateral. Assets commonly used for a secured business loan are commercial property, residential property, vehicles, and equipment. Business owners who use their home as collateral can run the risk of losing their home if they default.
Compared to an alternative solution such as a secured business loan, invoice finance is a great option for those business owners who are seeking a more flexible business finance option. In most instances, the only security required are the invoices themselves.
5. INVOICE FINANCE IS FOR STRUGGLING BUSINESSES
This is one of the most common misconceptions. While many businesses utilise invoice finance when they are struggling with cash flow, so do businesses who are in a position of growth. By securing a cash flow facility like invoice finance, this allows businesses to take on new projects and we have seen many clients go from strength to strength in this situation.
Your business may be experiencing a period of rapid growth; taking on a new business opportunity or have tendering for bigger contracts. You may need to invest in more staff, hire or buy new equipment, or settle existing debts before you can proceed.