Keen to understand if your business would benefit from invoice finance? If you’ve heard that term and others such as debtor finance and invoice discounting, but want to know more, Sam Ralton, Octet’s Director of Working Capital Solutions, is here to help.
What are invoice finance, factoring and invoice discounting?
Invoice finance products allow you to access funds by using your business’s outstanding invoices as collateral. “There are a number of terms used to describe these products,” says Sam. “Invoice finance, receivables finance, debtor finance – they all offer essentially the same facility, which looks at the receivables ledger or the invoices that are outstanding in a business and funding against those.”
Sam explains. “An invoice discounting facility is simply funding against the ledger. Factoring is a little more intense in that it reviews the day-to-day invoices. Factoring is a disclosed facility, where the finance company is effectively taking on the role of collecting outstanding debts on behalf of the business in most cases.”
What’s the difference between invoice financing and factoring?
Sam says the term factoring is used less frequently these days. “In the early days, invoice factoring was fairly intrusive. Businesses found they had to hand in every invoice, and the financier would chase up the debts.”
Today, reputable finance providers like Octet offer tailored invoice (or debtor) finance products and collaborative partnerships. “We have supply chain finance managers that are constantly in discussions with clients, looking for any cash flow issues or opportunities that may arise and assisting with these.”
Why would a business choose invoice finance over traditional finance?
What are the advantages of invoice finance over, say, a standard bank loan? Sam explains.
“Banks focus on ‘bricks and mortar’ assets and are very keen on taking property security and effectively offering a mortgage when it comes to business lending,” he says. “Not all businesses have sufficient property assets to use as collateral, nor do they generally want to use their Director’s personal assets as security.
“Invoice finance is effectively funding against the biggest asset in most businesses – the receivables ledger (cash owed to a business by its debtors or customers). That ledger typically sits there as an asset, not doing anything until paid pursuant to agreed payment terms. Because an invoice finance facility actually uses that asset as its security for funding, it’s removing the need for directors or owners having to put up property or other security.
“The banks are also very slow to move,” adds Sam. “They can take more than six months to approve finance applications.” Invoice finance applications, on the other hand, can be approved within a matter of weeks, allowing businesses to embrace opportunities quickly.
When should a business seek invoice finance?
There are several reasons why a viable business would look to invoice finance. They might have cash-flow issues (due to longer payment terms), need to restock quickly but are waiting for invoices to be paid before they can, or simply want faster moving cash flow to open various growth opportunities.
“Most businesses that speak to Octet about invoice finance have high supply costs,” says Sam. “Let’s take the example of a labour-hire company, which will raise an invoice after the work has occurred. But they must pay staff before their invoices are paid.”
Invoice finance allows these businesses to fund their workforces without having to wait for debtors to pay. This is particularly helpful in the growth stage of a business.
“These facilities grow with the business, because as you raise more invoices, you can generally access more funding. And as a business winds down, the facility pays itself out so the directors aren’t left with a large hole that takes away their property.”
What is the rate for invoice financing?
The costs involved with invoice finance vary depending upon the provider and the type of product. And, in general, there are two types.
There’s a disclosed structure where the business’s debtors know a financier is involved in collecting invoices. And then there’s a confidential structure where the business has more control of the process and debtors don’t know a financier is involved. The financier’s workload and therefore cost to the business vary depending on whether a business uses a confidential or a disclosed facility.
“Generally, there’s an interest component on the borrowed amounts, and then there’s a line fee or service fee,” says Sam. “There’s a bit more work involved in disclosed invoice finance because the financier is constantly reviewing the ledgers. Cost also varies depending on the business turnover and workload required.”
What are the risks of invoice finance?
Those unfamiliar with this type of funding might be wary of the work or costs involved. “There’s a fear of cost,” says Sam. “But the cost of invoice finance is probably only slightly more than a standard mortgage or an overdraft facility.”
The suitability of this type of facility depends on your business and its needs. A negative experience with invoice finance is often the result of choosing the wrong financier or using a product not suited to the business.
Business owners might also be concerned about handing over control of their accounts receivable or ledger management to a third-party financier. This is why choosing the right finance partner is vital.
So, how do I find a reputable finance provider?
Look for an invoice financier with a solid reputation, says Sam. “You need to have comfort in the security of the business that’s providing funding and partner with someone that’s going to last.”
Some finance companies offer quick fixes, which Sam advises businesses to avoid.
“There are a lot of companies that do short-term loans at higher interest rates, fairly quickly, but it’s not going to help a business become sustainable in the long term. We’ve seen business owners take up short-term loans and then realise how expensive they are. My advice is to look for a financier that is going to be a long-term partner and understands the overall business strategy and success measures.”
Is invoice finance the answer?
Octet has been providing working capital solutions, including invoice finance, since 2008. How can we work with your business? Contact our team to discuss a tailored approach to help you reach your business goals.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
