Everything You Need to Know About Invoice Finance
Mark Stevenson, Managing Director, Bell Partners Finance
Do you own or run a business? Have you ever sat back and taken stock of the time lag between when you issue your invoices and when you get paid?
One of the most important parts of any successful business is cash flow management. Without a regular stream of money coming into the business bills such as wages, utilities and rent cannot be paid.
It may be the case that you have a fantastic business, but you have cash flow challenges because of the time it takes for your invoices to be paid after they are issued – but how does this fit into the finance world?
Invoice finance, also known as factoring or cash flow finance, simply means selling (or borrowing against) your invoices. The concept is a simple one: if you have unpaid invoices you can sell them to a finance company who will pay you now, and chase your unpaid debt for a fee – it is a means of getting access to money for work done immediately and not having to wait.
To-date debtor finance is a relatively untapped resource in the Australian business market, but it is available and has proven popular with business owners across the globe including in the USA and UK.
As is the case with any type of finance, it costs money, which usually manifests in the finance company who is purchasing your invoices paying you a percentage of the face value of your invoices (usually 80%) up-front then taking their fees and charges from the remaining percentage once the invoice is paid.
The glory of debtor finance is that usually your 80% share of your unpaid invoice can be advanced to you within 24-48 hours of the invoice being issued or handed over to the funder/finance company. Once the finance company has received payment for your invoice, they will pay you the remaining 20% less their fees and charges (which can vary from 3-10% of the value of the invoice depending on the model you use).
Another benefit of factoring is that the transaction is not treated as borrowing, but rather as the sale of an asset (the asset being the invoice/account receivable), and therefore sits off the balance sheet.
There are a number of invoice finance models that business owner’s can adopt, including:
- 100% of your accounts receivable are funded through factoring. Conditions usually include a minimum finance period of 12 months and all of your accounts receivable are sold to the factoring company during this period (note this also eliminates the need to pay staff to recover accounts receivable).
- Minimum monthly commitment. Under this model the factoring/debtor finance company will require you to sell a minimum amount of invoices to them each month, most commonly to value of $25,000.00 per month. For invoices above this value threshold you have the option of factoring or receiving the full value of the accounts receivable in the usual course of business.
- One-off, single invoice transactions. This is the most expensive form of factoring, but can be used where the cash flow challenges are short term or related to a specific client (or the invoice in question is quite large).
- An ongoing (revolving) credit facility with the limit set based on the balance of the receivables ledger. As invoices are raised and payments are received, the available credit limit adjusts.
Some important things to remember:
- Some models allow for discretion, but most require the debtor to consent to the factoring process.
- Even though the concept of factoring relates to money owed to you, debtor finance/factoring companies will want to know that you can pay their fees and charges (as well as the money they forward you for your invoices) if they cannot recover the money from your debtor.
- You are responsible for payment of the invoice. If the factoring company cannot recover the amount of the invoice from the debtor, you will have to pay it back to the factoring company.
- The work resulting in the invoice must be complete – invoices for works in progress cannot be factored.
Adequate cash flow in a business can mean the difference between a business failing and becoming a long-term success story. The team at Bell Partners Finance are experienced in debtor finance/factoring. If you think this type of product might help your business, contact one of our experts today to discuss.
Phone: 02 9249 7600