Managing your cash flow and working capital position is one of the most important aspects of running a small to medium business (SME). Whether you are a growing business or currently struggling with stretched payment times from your customers, it is rarely an easy task. Traditional bank financing options such as a business loan or overdraft have their limitations. Common roadblocks include the requirement of property as security as well as being notoriously slow and inflexible. For SMEs that sell products and services on credit (issue invoices), there is an alternative funding solution that is becoming increasingly popular in Australia.
Invoice finance essentially allows your business to unlock cash from your accounts receivable ledger (unpaid invoices) to fund your business. To do so, providers will sometimes contact your customers to verify the outstanding invoices they are financing. This is known as a ‘disclosed’ facility, often prompting the question from many unfamiliar business owners, ‘what will my customers think?’ There is also a type of invoice finance that funds your unpaid invoices without your customer’s knowledge. Let’s take a look at both options in more detail; the differences between the two, and which is best for your business and customers.
Breaking Down the Basics – How Does Invoice Finance Work?
Invoice finance allows your business to access cash sooner from unpaid invoices. Invoice finance providers will pay you up to 90% of your verified outstanding invoice value upfront. When your customer pays and the funds are received by your invoice finance provider, they’ll remit the remaining 10% minus a small fee to compensate for early funding. Your business can use this cash instantly to pay your bills, secure new suppliers or invest in growth opportunities.
“Instead of waiting for a customer to pay their debt, your business can access cash almost immediately”
The facility acts as a revolving credit line linked to the amount you invoice your customers. As your business grows, so does the cash you’re able to access. You can choose to draw down funds as often or as little as you like, only paying for what you use. Instead of waiting up to 90 days for a customer to pay you your invoice, your business can access the cash almost immediately.
Depending on the provider, traditional disclosed invoice finance facilities may involve a level of administration and interaction with your customers. This is usually necessary to verify the unpaid invoices (collateral) they are funding against as true, correct and undisputed. Confidential invoice finance does not require your debtors to know that the invoice finance provider is involved (they are silent, in the background).
The Differences Between Disclosed and Confidential Invoice Financing
There are three main differences between these two types of invoice finance that you need to be aware of the following are features of a disclosed facility:
- An establishment letter is sent to your customers. When setting up your facility for the first time, your provider will send a letter to your customer. This letter will stipulate the new banking details they require as well as letting them know you have a financing solution in place to support your SME’s growth. With confidential invoice financing you will still be required to notify your customer of a change in bank details but there is no need to notify them the reasons for this.
- Verification calls are made. Every now and then, your disclosed invoice finance provider will contact your customer’s accounts payable department and make sure they have received the correct invoice from you. Your provider is not a debt collector. However, they do need to check when they expect to get paid (depending on your customer) before they advance funds. There is absolutely nothing wrong with this process, as the calls are friendly and often come across as being part of your business, if need be. No verification calls are made with confidential invoice finance, however if invoices do become significantly overdue then the invoice finance provider may, with your approval and assistance call the debtor to get reasons as to why the invoice/s are not being paid, they will again like disclosed invoice finance, tread very carefully so as to ensure they dont cause any issues between you and your client (this applies for both solutions).
- Notice of assignment. This is a simple notice that needs to be added to every invoice you send out. It tells your debtor that they are required to pay your invoice finance provider as the invoices are now assigned to them. A NOA is not issued for confidential facilities.
Which One is Best for My Business?
While confidential invoice finance does have its benefits, it’s usually only available to established firms that meet a set of strict criteria. Often, your business will need to have been trading for at least five years. Financially, you’ll typically need to clear $10 million+ in annual revenues, carry no other major debt and have a strong balance sheet. Most SME’s struggle to meet these restrictive criteria, hence the continued popularity of disclosed invoice finance. Undisclosed invoice finance is a very popular funding solution for medium to larger businesses.
Disclosed invoice financing has become an accepted part of the trading process. Thousands of Australian businesses are switching to invoice financing each year, driving nearly $40 billion in annual turnover in 2018 (Debtor and Invoice Finance Association). It’s likely your debtor has more than probably encountered it before – perhaps they even use it themselves. So while your customers will know you are using a financing facility, it won’t be looked down upon. In fact, it’s often a great sign that your business is powering ahead!
Don’t let a lack of cash hold your business back. Use your unpaid invoices to unlock tomorrow’s cash today with OptiPay.