INVOICE FINANCE

Business invoice financing is on the rise in Australia.

It’s becoming an increasingly popular way to release precious cash flow.

Invoice factoring, also known as ‘accounts receivable finance’ or ‘invoice finance’ or simply “factoring”, is a type of business finance that can offer a quick boost to your cash flow.

The factor will then collect payment from your customer and pay you the remainder of the receivable, keeping a percentage as their fee.

Pros

Immediate cash injection – funds can be in your account within 24 hours.

You avoid the hassle of collecting debts, freeing up your time to concentrate on your business.

Your customers may be more likely to pay on time when a factor is collecting the debt.

Factoring companies often perform credit assessments on your customers. You may be able to use the information they provide to negotiate better payment terms with your customers.

Quick and easy to arrange – usually no lengthy application process or onerous criteria.

Availability depends more on your customers’ credit ratings than your own, so even startups and businesses with bad credit may be able to access factoring.

With some factoring providers you can pick and choose which invoices you sell, when – giving you total flexibility and the ability to get a quick cash injection when you need it.

Factoring isn’t a loan, so you won’t be taking on debt or paying interest – and it won’t show up on your balance sheet. It can allow you to offer more generous payment terms to customers, potentially securing you more business. If you opt for non-recourse factoring, you’ll avoid the risk of late payment or bad debts.

Cons

Factoring can be more expensive than other forms of short term finance, especially where there are hidden charges. Be sure that you know the TOTAL cost, including admin fees, transfer charges and any penalties, before you choose a provider.

Factoring reduces your profit margin on each invoice you sell. It can damage your relationship with your customers – they no longer deal exclusively with you, and the factor may use aggressive collection methods.

It can also indicate to your customers that you have cash flow problems, potentially making them wary about dealing with you.

Some providers will seek to lock you into long-term contracts where you are required to sell them a minimum volume of invoices, or all invoices for certain customers. This can be detrimental to your business, especially if there are heavy penalties for breaking the contract.

The availability and cost of factoring will depend on your customers’ credit ratings rather than your own. Some lenders may seek to restrict you from doing business with certain customers.

With recourse financing, you will have to buy back any invoices where the factor has been unable to collect payment. If you decide to end your arrangement with the factor, you’ll have to buy back any unpaid invoices, which could have a big impact on your cash flow.