Mention cash flow finance to the average small-business owner in Australia and you might get a funny look — it’s a term many have heard but few really understand.
However, in other countries such as Britain and the United States, the reaction from business owners would be quite different. Since the financial crisis, invoice financing otherwise known as invoice finance, invoice discounting or debtor finance has become the popular alternative to business loans and other debt financing methods.
This is because invoice finance is a great way to improve your business’s finances, raise capital for investment and ongoing operations, and protect against the risk of late payments.
What Is Cash Flow Finance?
Cash flow finance is a form of funding in which a provider purchases the invoices that your company issues, paying up to 90% of the face value of the invoice within 48 hours and then waits for the debtor to pay the invoice in 30-60+ days time. This is also called invoice finance, invoice discounting or debtor finance.
A variant to this for those businesses that are importing or exporting product is trade finance, which sees the money advanced against international purchase orders, with the client repaying the funds that were received to pay the suppliers when the good have been imported, sold and money collected from the local debtor.
In both cases, the money the business receives is repaid together with a small fee charged, when the customer or debtor settles the invoice. There are no ongoing repayments of principal and interest like business loans.
The Cost of Cash Flow Finance
With a funding provider like Tim Finance, the cost of each transaction is based on a pre-agreed fee structure. The amount a business pays for a rolling facility over the course of a year can often be very competitive when compared to a business loan, whether from a bank or an alternative lender.
Unlike most banks, Tim Finance doesn’t hide any charges in its small print — so if you want an exact answer as to what cash flow finance will cost your business, just get in touch, and we’ll give you a quote – you may be surprised at just how affordable it is.
Who Benefits from Cash Flow Financing?
Cash flow financing is available to all businesses who regularly sell to, and invoice, other businesses. Usually, cash flow finance firms have a minimum amount that you can raise, but that level is well within reach for most B2B companies.
You can’t raise funding from invoice finance if you only sell directly to the consumers (B2C). On the plus side, private buyers or consumers don’t usually take 90 days to pay!
How Much Money Can My Business Raise with Cash Flow Finance?
The amount of money a business can raise is always relative to its current trading situation. This is one of the key advantages of invoice finance.
Companies which sell to other businesses usually get paid between 30 and 90 days after their invoices are issued, but a nimble funding provider like OptiPay can deliver up to 90% of the face value of each invoice within 48 hours of approval. You still get the rest when the customer settles the bill, less a small ‘discount fee’.
Using this system, a business can raise significant sums and these will always be directly relevant to its current sales and billings of a business. What’s more, as soon as turnover starts to grow, the business can increase the amount of its cash flow finance facility.
The Difference between Cash Flow Finance and a Business Loan
Because the money raised through cash flow finance is effectively guaranteed by the invoice itself — an asset — the cost of financing often compares favourably with a business loan and in many cases is even cheaper. However, because the products are very different in nature, they can be difficult to compare.
When considering the cost of invoice finance, business owners should not try to work out an APR or annualised interest rate. Cash flow finance isn’t debt so rather than trying to calculate an interest rate and annualizing it, business owners should add up the fees they would pay to discount each invoice relative to the time period that their debtors take to pay their invoices (30 to 90 days) and use that as a percentage of the value of the invoice to determine actual cost.
This total should be compared to the total cost of a business loan over the year — that means, adding up interest payments and all the ‘little’ fees that your non-bank funder charges on top. This way, you will have two actual dollar figures to compare.
Cost isn’t everything, though. Cash flow finance has a number of practical advantages over traditional business loans. For a start, it’s readily available for B2B companies – using a platform, invoice finance is much faster and easier to set up than applying for a loan, and it’s based on your business sales not on its profitability.
Secondly, cash flow finance is safe for small and medium-sized businesses.
OptiPay provides suitable insurance against the possibility of unpaid invoices as a result of a debtor going into insolvency. By comparison, missing payments on a bank loan can be very problematic – at the very least, extra charges will apply, and ultimately the bank could move to wind up the business. In the case of secured business loans, small business owners can get into real financial difficulties personally if they have – as many do – use the family home as collateral.
If you want to know more about what cash flow finance could do for your business, don’t be afraid to ask! Call OptiPay today to see how much you could raise and get a clear understanding of the costs involved.
Did you find this article interesting? Why don’t you learn how small and medium-sized businesses can use cash flow finance to fund their growth ambitions.
Who is OptiPay?
OptiPay, one of Australia’s leading business finance providers, has been dedicated to helping small business owners solve cash flow challenges for over a decade and has provided $1.5 billion in business funding to more than 500 Australian businesses. OptiPay specialises in modern financing solutions such as invoice factoring, invoice finance, debtor finance, and lines of credit. OptiPay’s mission is to support business growth providing liquidity in as little as 24 hours, ensuring they have access to tomorrow’s cash flow today. This rapid access to funds helps businesses maintain smooth operations and seize growth opportunities without the stress of cash flow constraints. At OptiPay, we believe that healthy cash flow is the lifeblood of any successful business. Our commitment to helping businesses overcome financial hurdles and achieve their growth ambitions has solidified our reputation as a trusted partner in the business finance sector. Whether you are looking to stabilise your cash flow, expand your operations, or navigate financial challenges, OptiPay is here to support your journey with innovative and efficient financing solutions.
