Surviving the credit crunch with debtor finance

A major effect of the GFC is that businesses can no longer rely on banks for financing to help smooth out cash flow shortages. They are also finding that their customers are taking longer to pay for goods and services. Businesses in Australia may therefore need to consider other forms of business finance solutions, such as invoice financing.

An invoice finance facility (also called factoring or business cash flow finance) can provide businesses with a flexible line of credit against receivables or unpaid invoices. You can receive up to 90% of the value of unpaid invoices within 24 hours, meaning that your business doesn’t have to wait up to 30 days or longer to access cash once the customer has made payment.

What this means is that businesses has access to a flexible, reliable supply of working capital when needed, to improve cash flow and grow, free of the constraints commonly encountered with other forms of cash flow finance (e.g. overdrafts).

The types of businesses most suited to invoice finance are those that supply goods on credit (for example, manufacturers and wholesalers) and businesses that have large labour costs (for example, recruitment or security firms).

The major differences between invoice finance and traditional business finance through the bank is that invoice financing decisions are based on the credit-worthiness of the customers, whilst a bank makes credit decisions based on the financial history, cash flow and security of the business.

Invoice financing is not a loan, so no liability appears on the balance sheet. More importantly, invoice financing decisions are made within days or hours, while banks can take much longer.

Reasons why invoice finance is used

• The business does not qualify for traditional bank finance
• To provide greater certainty in managing day to day cash flow
• The business is growing and working capital is inadequate
• The directors/shareholders want to fund the business based on business assets and not real estate security
• The director/shareholders want to avoid introducing new equity partners which means losing control or sharing the profits

Benefits of invoice finance

• Improved control over cash flow to better fund business operations
• Allows the business to expand by extending terms of trade, knowing that the invoices will be paid promptly
• Enables the business to meet wages, tax, and supplier payments on time
• Increases working capital to grow, free of funding constraints
• Improves margins by using better buying power to take advantage of early settlement discounts and bulk discounts on purchases
• Saves management time through outsourcing receivables management to professionals
• Real estate security is not required

Disadvantages of invoice finance

• The business needs to have a certain level of turnover, normally in excess of $100,00 of credit sales and sells on a business to business basis
• The business still needs to maintain a good relationship with its customers and ensure that terms of trade and credit application controls remain in place
• The financier will not fund the entire debtor’s ledger, but only those it approves as secure
• The business usually still bears the risk of bad debts

It’s important that businesses consider whether invoice finance, like with any form of business finance, is suitable to their business and carefully access how the accelerated cash flow is to be effectively utilised in the business. To find out more about invoice finance and other business finance solutions, speak to one of our mortgage brokers on 1300 55 10 45 or visit www.intellichoice.com.au to find out how we can help you grow your business.

Visit us at: www.intellichoice.com.au

Paid Advertisements Below