Invoice finance is a solution that is becoming popular with small and midsize companies. This article helps you determine if invoice finance is the right solution for your company. We guide you through eight questions to ask before considering an invoice financing facility.
1. Can my cash flow problem be fixed using invoice finance?
The first question to ask is if invoice financing is the best solution for the type of cash flow problem your company is facing. Invoice finance helps companies that need funds sooner than the 30 to 60 days it takes their customers to pay. You can use it to pay operational expenses (such as payroll, rent, and suppliers) when you can’t wait until you get paid by your customers. Unfortunately, invoice finance doesn’t help if your cash flow problems are caused by something different. To learn more, read “What is invoice finance?”
2. Do my customers have good business credit?
Invoice financing works differently from the way that conventional financing works. It allows you to sell your invoices to a debtor finance company and get an immediate payment. However, debtor finance companies buy your invoices only if your customers have good business credit. They typically check your customer’s business credit using a credit bureau, such as Illion. A debtor finance company won’t be able to buy invoices that have collections problems or don’t meet their funding criteria.
3. Do your customers pay in less than 90 days?
This solution works best for invoices that are payable in 15 to 60 days. It can work for invoices that take longer to pay as long as they don’t exceed 90 days. Invoices that take 90 days or more to pay are not eligible for financing. This restriction is due to increased risk and other challenges.
4. Do my profit margins allow you to cover the financing cost?
The cost of invoice financing is higher than the cost of conventional bank financing. Debtor finance companies typically charge an administration fee and an interest rate. The administration fee is charged on every invoice, while the interest rate is charged on the utilised funds.
Rates vary based on sales volume, invoice diversification, and customer credit quality. Generally, invoice finance works best if your profit margins exceed 20% and your customers pay in 60 days or less. However, each situation is unique. You should evaluate invoice financing based on the benefits you expect to get. Read “How much does invoice finance cost?” for a detailed explanation and an example.
5. Does my company have serious financial problems?
This solution can be used by companies that have financial problems. It’s a common solution for companies that are going through a turnaround. However, keep in mind a few limitations. Companies with tax problems must have a payment plan in place with the ATO before the line can be deployed.
6. Will my customers support my decision to finance my invoices?
Invoice finance lines require some involvement from your customers. When you start financing their invoices, your customers receive a Notice of Assignment (NOA). The NOA advises them that a debtor finance company is managing your invoices. It also requests they update their payment information.
Debtor finance companies also verify your invoices regularly. This step helps ensure invoice accuracy. It is commonly done through your customer’s vendor portal (if they have one).
7. Do you have other financing solutions in place?
Debtor finance companies buy your accounts receivable as part of the transaction. During this process, they secure their position by registering a PPSA. The debtor finance company must have the first position on your accounts receivables for the transaction to work. However, this positioning may not be possible if your company has existing financing.
Using invoice finance in combination with other financing is usually difficult. Most business loans, lines of credit, and cash advances are secured by your company’s assets. This arrangement prevents the finance company from getting the first position on your accounts receivable.
8. Will my company qualify for invoice finance?
You need to evaluate if your company qualifies for invoice finance. Most debtor finance companies check to see if your:
- Customers have good business credit
- Aged receivables report has eligible invoices
- Invoices not pledged as security
- Business has tax/legal problems
- Background meets their requirements
- Business meets their funding requirements
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