Invoice Financing: How it Can Help Your Business

Invoice financing can help you to improve the cash flow of your business! You can use it as a strategy if you offer your customers credit (for example, 30-day accounts). Instead of waiting for your customers to pay you, you can get the money you’re owed straight away! This reduces your risk of providing customer credit and saves you tying up your funds.

Here’s how invoice financing works.

  1. You sell the value of your accounts receivable (i.e. the money your customers owe you) to your lender. This provides your lender with collateral security. In other words, it reduces the risk of them lending money to your business.

  2. Your lender will provide you with an immediate loan. The amount will be based on a percentage of the value of your accounts receivable. You can then use those funds any way you need to. For example, to pay your suppliers or your staff, or to reinvest in your business.

There are two main ways that an invoice financing arrangement can be structured. They are ‘factoring’ or ‘discounting’. We’ll look at each of these methods in turn.


Invoice factoring

Invoice factoring involves your lender taking responsibility for collecting your customer payments. You outsource that task to them. Your lender will pay you a percentage of the total amount owing up front (for example, 70%).

The remaining amount owing (e.g. 30%) will be paid to you when it is collected by your lender. They will charge you a fee for the debt collection service they provide. This fee will usually include a provision for “bad debts”. In other words, for customers who don’t pay the amount they owe. Your lender will also usually charge you interest on the money they’ve lent you.


Invoice discounting

You keep the debt collection responsibility with an invoice discounting arrangement. It involves your lender providing you with a loan for a percentage of the amount owed by your customers. For example, a loan for 95% of the total value of your accounts receivable, after allowing for bad debts. You repay the lender the amount you’ve borrowed (plus any fees or interest) when your customers pay you.


The pros and cons of invoice financing


  • It helps with your cash flow.

  • It can reduce your risk of bad debts.

  • Invoice factoring can save you the time and expense of chasing up your customers for payment.

  • Invoice discounting enables you to keep dealing with your customers directly. This can help you to keep building your relationship with them.


  • You’ll be charged fees or interest by your lender. These costs can be relatively high. The benefits need to outweigh these costs for invoice financing to be worthwhile.

  • You’ll still have to spend time chasing up your customers for payment if you use the invoice discounting method.

  • If you use invoice factoring, you run the risk that your lender will not be concerned with building your customer relationships. Their only priority will be to get paid. They may be impersonal in their communication.


The bottom line

Cash flow can be one of the biggest problems for new and fast-growing businesses.  Invoice financing is an option to consider if you extend credit to your customers. Whether it’s a good option for your business will depend on your circumstances. If you’d like to discuss financing possibilities with your accredited broker, just call 1300 301 051.


DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.

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