by Linden Toll, CEO and founder, Apricity Finance
In the wake of the Royal Commission recommendations, many brokers are now looking at expanding their business finance offering as a way of ensuring future growth. Additionally, tightening lending conditions means that invoice finance is becoming increasingly utilised by SME businesses who can’t get what they need from traditional lenders. But as with any product, it’s critical to understand the pitfalls along with the benefits.
1. Consider the time value of money
Invoice finance allows businesses to get their money back into their business faster. When looking at the cost of invoice finance, it is important to remember that a dollar 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.
2. Not all invoice finance is equal
The terms factoring, invoice discounting and supply chain finance are more or less used interchangeably. However, there are some distinct differences.
- Selective Invoice Finance: is the model we use. Customers can choose which invoices to fund, when and what percentage (within prescribed limits).
- Factoring: the provider often takes on the role of managing the debtor ledger and chasing payments. The provider will often want to manage the entire ledger – meaning you cannot choose which invoices you fund.
- Invoice discounting: a financier will advance a percentage of the face value of an invoice, often around 80%. However, the business maintains control of chasing invoice payments.
- Peer to peer (P2P): This is making lots of noise globally – not just with invoice funding, but with loans and investments of all kinds. With invoice funding via P2P, the business seeking funding can access investors directly via a technology platform. You state the terms you need and the investor sets the interest rate.
3. Flexibility and transparency = certainty
The biggest criticism of the different invoice finance models are the very stringent contracts that providers place companies under. We often work with businesses to try to find ways to exit contracts that no longer suit their needs. Sadly this often means enormous exit fees payable to the provider.
For invoice finance to be of greatest benefit to a business, it needs to be ‘at call’. They can choose when they use it and when they don’t, without incurring penalties.
4. Help in times of growth
Often businesses experiencing rapid growth will run into trouble because they have exhausted their lines of credit, already mortgaged their house or built up an ATO debt. This is where invoice finance can be really beneficial:
- ATO Debts - The right invoice finance facility can also help businesses clear existing ATO debts, freeing their balance sheet to access finance for new equipment or other capital expenditure.
- Exhausted lines of credit - Let’s say a business wins a new contract and needs to hire more staff or buy new machinery. But with their house already on the line, overdrafts and credit cards at their limits, their options may be limited. By utilising invoice finance, the business can clear existing debts, paving the way for further finance.
- No property security - As the invoices themselves are usually the only security required, business owners do not need to put up homes or other personal assets as security
5. Understand facility limits
Facility limits are usually set based on the value of the debtors’ ledger. However, if invoices are late or concentration limits are imposed (because the ledger becomes skewed heavily to one client or industry), most lenders will change that limit. Therefore, one day the limit is $500k and after applying late invoices and concentration limits, the business may only have access to $400K. It is vital to understand how late payments and concentration can affect the facility limit before signing any contract.
6. Know the contract
Most importantly, read the fine print. Often hefty account keeping and facility fees can blow the actual cost to the business well beyond what was originally quoted. Often this is not apparent until the client is months into the contract. Look for a clear, simple contract that allows the business to use the facility when it suits them, without financial retribution.
CEO & Founder