Invoice Finance is a great solution for small and medium-sized businesses in New Zealand looking to increase working capital, improve their cash flow management, and fuel sustainable, long-term success.
But what exactly is Invoice Finance and how does it work? In this article, we’ll break down what you need to know about this business funding solution to get started.
What is Invoice Finance?
Invoice Finance is a type of business funding solution. It is sometimes referred to as debtor finance or accounts receivable financing. It works by enabling businesses to access what is essentially a line of credit by leveraging outstanding customer invoices as collateral.
Your business gains working capital by ‘borrowing’ against your unpaid invoices, unlocking the value of unpaid invoices to meet short-term liquidity and expenditure needs.
Why use Invoice Finance?
Businesses in New Zealand can and do use Invoice Finance to relieve gaps in cash flow and ensure reliable access to the funding they need to operate and grow. Collecting payment on unpaid invoices can be tricky for small and medium-sized businesses, especially those without dedicated accounts receivable departments. Invoice Finance can assist by providing access to tomorrow’s cash flow today.
Whether you need to pay suppliers, meet payroll, fund overhead costs or even take advantage of opportunities in the market for growth and investment, Invoice Finance can be a critical tool to help you overcome difficulties with cash flow.
Do Businesses Use Invoice Finance in New Zealand?
According to Business Money, more companies in New Zealand are turning to this funding solution to manage their cash flow. For small businesses, in particular, Invoice Finance allows for quicker access to working capital without having to wait the extended invoice payment terms that can be typically expected by larger customers. In fact, some payment terms can extend well beyond the 30-day standard to 60 or even 120 days!
Understanding the Different Types of Invoice Finance
Invoice Finance is actually available in different types of arrangements. Each brings with it unique pros and cons, so it is important that you understand the difference.
Of course, the lending specialists at your local ScotPac New Zealand office are always happy to help if you would like custom advice.
1. Invoice Factoring
Invoice or debt factoring is a financial arrangement in which your businesses sells its accounts receivable to a lender, such as ScotPac. This can either be done in the form of selling your entire ledger of outstanding invoices or select invoices.
Once the invoices are sold, the finance provider advances an agreed percentage of the total invoice value upfront. When payments are collected from your customers, the remaining balance is released to you, minus any applicable fees.
Invoice Factoring is useful for businesses that may lack an in-house collections department and/or businesses looking to improve cash flow but without the need for strictly confidential financing arrangements. Because the facility provider, such as ScotPac, takes on the responsibility of collecting payments and managing credit control, your customers will typically be aware of your partnership with the finance company.
2. Invoice Discounting
Invoice Discounting is another form of Invoice Finance. With this option, you can access a line of credit using your accounts receivable as collateral, but you maintain control and responsibility over the collection process. Similar to factoring, a percentage of the outstanding invoices’ value is provided upfront and the remaining balance – minus any fees – is released to you once payment is collected from your customers. The difference is that your business is responsible for collecting payments from your customers.
Invoice Discounting is generally more suitable for medium or larger sized enterprises that both have sufficient accounts receivable or collections department and require confidential finance arrangements
3. Selective Invoice Finance
Selective Invoice Finance is also known as spot factoring. Simply put, it provides businesses with the flexibility to choose which invoices to submit for financing. This option is particularly beneficial for SMEs that deal with a limited number of high-value invoices. Businesses that trade in large volumes of lower value invoices generally do not use selective Invoice Finance.
Selective Invoice Finance allows your business to control when and how much funding you access, addressing cash flow gaps as needed.
What are the Pros and Cons of Invoice Financing?
When evaluating funding options, it’s important to factor in the advantages and disadvantages of Invoice Finance for your business.
Advantages of Invoice Financing
1. Flexible Access to Funds
Your business can quickly and reliably access cash otherwise tied up in outstanding invoices.
2. Improved Cash Flow Management
This method helps to stabilise your business’s cash flow, allowing for better financial planning and more efficient cash flow management.
3. Leverage Outstanding Invoices
With Invoice Finance, you can use receivables as collateral for immediate funding rather than your property or personal assets.
Disadvantage of Invoice Financing
Invoice Finance can be more expensive than some other forms of business funding due to additional fees. It’s essential to understand what the cost of accessing this finance facility will be to determine what aligns best with your business’s financial goals.
Understanding the Fees
Fees associated with invoice financing can vary significantly among providers. Common fees include discount fees or interest charges which are based on the amount of funding being financed. Additional charges, such as administration or credit check fees, vary by provider.
To make an informed decision, always compare these costs against other funding options available to your business.
Comparing Invoice Finance vs. Unsecured Business Loans
Unsecured business loans offer a lump sum loan that is repaid through regular installments over a specified period of time. Being unsecured, these loans do not require collateral in the form of assets or property. However, lenders often require evidence of repayment capability and/or personal guarantees from applicants.
Invoice Finance, in many ways, offers greater flexibility than unsecured business loans. To start with, there are no fixed repayment terms as repayment occurs when your customer settles their account with you.
Additionally, the cost structure is also determined based on the totally invoice value so that the fees associated with this business funding can be more cost effective for SMEs.
Lastly, being less stringent in loan criteria, Invoice Finance can offer more readily accessible finance for businesses who otherwise may not quality for a business loan.
What Eligibility Criteria is Required for Invoice Finance?
Invoice Finance is designed to improve cash flow for businesses across various industries. Its greater accessibility allows businesses with less than stellar or no credit history to access the funding they need.
So what is the eligibility criteria? For one thing, the finance provider will evaluate the risk associated with your outstanding invoices by checking your customers’ creditworthiness. They may also seek to understand your existing accounts receivable management. When it comes to invoice discounting, having an efficient collections process and/or department is necessary.
There may also be a requirement for a certain volume or value of invoices, which could be a barrier for micro-businesses or start-ups.
We recommend having a discussion with our finance specialists to find out whether your business meets the minimum criteria for Invoice Finance
Applying for Invoice Finance
The application process for Invoice Finance varies by provider but usually involves submitting relevant financial information and details about the invoices you wish to leverage for funding.
At ScotPac, we use advanced technology and cloud-based programs to expedite access to working capital for our clients and make the application process as easy as possible.
Impact of Invoice Financing on Customer Relationships
Some businesses have concerns about how Invoice Finance might affect their relationship and reputation with customers.
While involving a finance provider in collections may seem concerning, transparent communication can alleviate potential issues and ensure there is no misunderstanding. In fact, to the contrary, timely payments facilitated by a robust Invoice Finance solution can actually enhance customer satisfaction and foster stronger relationships – without compromising your cash flow.
Of course, confidential invoice discounting options exist as well which allow established businesses with in-house collections teams to maintain discretion as required. There is enough flexibility in approach to tailor your Invoice Finance arrangement to suit your needs and preferences.
What Happens if My Customer Doesn’t Pay the Invoice?
At the end of the day, the answer to this question will depend on the terms of your funding arrangement.
In most arrangements, your business will be responsible for the costs of any bad debt. The finance company providing the funding will carry out due diligence before approving an invoice or invoices for funding. This is to minimise the risk of non-payment and ensure the credit ratings of your customers pass their minimum acceptance level.
However, there will always be a certain element of risk.
Make sure to speak to your local ScotPac lending specialist about Bad Debt Protection. This form of insurance can help safeguard your business from the risk of customer non-payment.
Is Invoice Finance Right for Your Business?
Ultimately, whether Invoice Finance is right for your business depends on your specific circumstances and objectives. At ScotPac, we provide flexible solutions that can be tailored to various business needs. These include funding solutions without lock-in contracts or other comprehensive services such as collection and account management.
Many small and medium-sized businesses face challenges securing traditional funding due to short trading histories or low credit ratings. For these SMEs invoice financing can provide a viable alternative.
Additionally, if you supply goods or services to larger businesses on net terms, Invoice Finance can effectively bridge cash flow gaps allowing you to continue operations, reinvest in growth, and achieve sustainable success. For this reason, Invoice Finance is becoming increasingly popular as a preferred funding solution across industries in New Zealand.
Contact ScotPac Today to Learn More About Invoice Finance
Did you know that ScotPac currently supports over 8,500 businesses and funds $23.9 billion in invoices annually?
This expertise makes us industry specialists in helping small and medium-sized businesses turn outstanding invoices into instant working capital.
At ScotPac, we see our clients as partners, not transactions, which is one of the many reasons they choose to partner with us for the long term.
To explore how Invoice Finance can benefit your business, contact our team today.
