How to make the most out of invoice financing
- Written by Angus Sedgwick, CEO of Optipay
If you’re running a successful SME, chances are at some stage you’ll be struggling with cash flow. Often businesses who come to us are in a period of growth and are wanting greater accuracy in their cash flow budgeting.
Invoice financing is about accessing tomorrow’s cash today. Instead of a business having to wait 30+ days to be paid by their customers for goods or services delivered, invoice finance allows businesses to access up to 90% of the amount invoiced to their clients upfront, with the balance less a small fee received when the client/debtor pays their invoice.
Businesses can typically access up to 90% of their sales revenue within 24 hours of issuing the invoice. Unlike more traditional business loans there are no ongoing repayments back to the financier as they are repaid when the debtor makes payment of the invoice/s. The fee paid to the financier usually ranges from <1% up to 3% of the invoice value.
Things to ask before deciding on a debtor financing company
How transparent is the contract (is every fee and charge disclosed)?
Does the financing company match your funding cycle needs?
Are there any hidden charges?
What are the advance rates specific to your industry (this can vary from 70% to 95%)?
How much flexibility does the company provide?
Is there a monthly minimum amount that you need to finance or a minimum monthly fee you need to pay?
Are you satisfied with the total rate that the company is offering you?
Is it a disclosed or undisclosed facility?
What has been their turn around time from first speaking to them until receiving their funding offer – long time frames often reflect what their ongoing customer service will be like.
In the USA, UK and Europe, invoice financing is one of the most utilised types of business finance due to its ease and flexibility of use, whereas in Australia it’s estimated that less than 5,000 SMB’s out of over 65,000 eligible businesses utilise invoice funding.
As we start to see further pressure put on global supply chains, we’re expecting many more businesses will start to plan ahead and implement contingencies for delays in freight. They will require cash to do this.
Unfortunately the reality is the majority of SME’s are not strong cash flow managers. Using your funds efficiently is the key to providing the environment your business needs to succeed, as well as avoiding a recurrent cash flow problem in the future.
So how can you make the most of invoice funding for your business?
- Figure Out Your Needs
You need to prioritise your cash flow needs. Which areas of your business need more cash and why? If you’re running behind on payroll, tax or debt that should be taken care of first. When you have the basics covered, what other areas would benefit from a cash injection? Often our clients chose to increase inventory levels and purchase more supplies to generate additional sales. Another tactic used is to draw up a list of candidates in order of financial impact and then allocate cash progressively down the list as it becomes available.
- Don’t Splash the Cash
You want to use your cash flow wisely and satisfy opportunities without wasting it on areas that are unlikely to deliver a return on investment. Focus on nailing the basics first and then invest in riskier growth initiatives if your cash flow allows. Invoice finance is also one of the best ways to go about funding a new venture because, unlike a bank loan, there are no limitations on what you can use the money for.
- Be Patient and Calculated
While invoice financing is one of the best ways to improve your cash flow, both immediately and in the long run, it is not a miracle. You need a clear, patient mind to be able to figure out priorities and reign in aggressive spending. Don’t rely on the cash generated from finance to run your business on its own. Calculate what the best option may be when it comes to investments and don’t make rash decisions on the spot. For every SME the most important thing is keeping your existing customers happy.
- Eyes on the Prize
While solving short term cash flow issues may be the immediate priority, successful SMEs plan ahead for the future. Without a long-term business plan, your business may not exist at all in five years time. Invoice financing is an opportunity to free up capital for meaningful, longer-term strategic investments. Consider investing in areas that will build your brand and efficiency beyond just paying suppliers and securing inventory. How would upgrading your Customer Management technology improve conversation and feedback? Would spending money on a greater social media presence elevate your brand? Keeping your eyes on the broader prize is critical to getting the most out of your operations today and in the future.
- Keep your Team in the Loop
Your staff are often your greatest asset. Keep them involved in the decision-making process. Service-facing staff are the eyes and ears to your customers. What are they saying? What customer preferences are they observing? What do they not like? Employee morale is another qualitative measure that goes beyond the bottom line. Invoice financing should improve the holistic health of your SME, from the financials to processes and to people.
There is a broad range of businesses who can benefit from invoice financing, particularly those who have credit terms of 30 days or more. Our services are popular amongst wholesale, manufacturing, transport & logistics, labour hire, and services businesses. Essentially any business that invoices another business for goods or services on credit terms. We are not a factoring house – you will still need to manage your debtors – but we’re here to help and make the invoicing process more efficient.
About OptiPay
OptiPay, formerly TIM Finance, provides Australian SMB businesses needing cashflow to grow, with innovative funding solutions such as invoice finance, trade finance, inventory finance and lines of credit. Their range of fast, flexible and affordable financing solutions help businesses solve their cash flow challenges, without the need for property security. Find out more at https://optipay.com.au
