How Invoice Finance is Driving Australian SME Growth – Now and into the Future

Small business is the backbone of the Australian economy. According to government figures, SMEs account for a full third of gross domestic product, employ over 40% of the workforce, and contribute 12% of commercial tax receipts across the country*.

But there’s a growing problem concealed behind this picture of health. Cash flow is an increasingly pressing issue for most small and medium businesses. Without the financial reserves and almost limitless credit access of larger companies, most SMEs rely on prompt payment of invoices to continue operating effectively.

Whilst standard payment terms were once 30 days, it’s now commonplace for invoices to be issued with 60 or even 90 day terms, and as small businesses tend to have little leverage over major companies, these unfavourable terms are accepted without argument.

As a result, it’s estimated that over 80% of SMEs are adversely impacted by delayed payments from larger companies, according to research from Xero.

Without the security of working capital fluidity, SMEs are often reluctant to take on large projects or fund major expansion. Cash flow issues can also mean forfeiting early settlement discounts from suppliers, with consequent direct impacts on margins.

All said, cash flow issues act as a powerful brake on the growth of this vital sector of the economy.

Traditional Financing

When it comes to resolving cash flow difficulties, the situation for many SMEs is even bleaker. Traditional ways of funding working capital are becoming ever more difficult to access, not least during the last decade of financial sector retrenchment.

Of the roughly $900bn in commercial lending currently outstanding in Australia, less than a third was advanced to small business. Today’s mainstream banks often see SMEs as a source of deposits rather than a lending opportunity, largely giving preference to residential lending, a sector that’s currently worth five times that of small business credit.

Invoice Finance as a Solution

So where can small and medium businesses turn to for the working capital they need to fuel growth? Alternative finance solutions are moving in to fill the gap, particularly the expanding field of invoice finance.

Invoice finance works by unlocking the value held in a business’s accounts receivable ledger. Unpaid invoices are used as collateral for low-cost credit, without requiring traditional asset types to be risked. In short when an invoice is issued to a client by a business, invoice finance is able to advance up to 90% of that invoice value to the business within 24 hours of the invoice being verified, instead of having to wait 30 to 90 days for payment. All this for a very small fee, equivalent to a small early settlement discount – no ongoing principal and interest payable like a loan – invoice finance is not a loan it is simply advancing a business its own cash upfront instead of waiting weeks and weeks.

Businesses can be paid a substantial proportion of each issued invoice value, receiving the funds in a matter of hours or days rather than months. This drastic reduction in payment delays smooths out cash flow fluctuations, giving businesses the agility, they need in today’s markets to continue growing.

Despite significant historical growth, the Australian Debtor Finance market has a relatively low penetration rate of only 3.9%, compared to the UK with a penetration rate of over 15.5%.**

Despite the important and growing role invoice finance is playing in Australia, there’s clearly room for it to drive business growth further, with the long-term potential to outshine SME lending from traditional sources. It is a very under-utilized offering when compared, not only to the UK but when comparing to many other countries.


**Source: Factors Chain International Annual Review, Euromonitor.

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