Dispelling the myths of invoice financing

Businesses in Europe and the USA have traditionally viewed invoice finance as a legitimate means of managing business cash flow. By contrast, in Australia, invoice financing has been associated with business failure. For example, it is seen as your last resort for borrowing.

However, commercial attitudes have slowly started to change in Australia over the past two decades. Invoice financing is now seen as a genuine way for a business to juggle financial commitments. This type of financial solution grows with a business, as the facility limit is set by the value of invoices rather than mortgaged property or other securities.

There are many myths and  misconceptions regarding invoice financing which we have tried to address below.

Myth #1: Invoice financing is a sign your business is in trouble

This myth stems from the fact that many business owners do not closely monitor their cash situation. As they do not analyse trends and take pre-emptive action, they are surprised by serious cash shortfalls that jeopardise their business. When they finally do ask for help, they are already near default or close to closing their doors. Consequently, they cannot qualify for a bank mortgage loan or line of credit and the only option left for them is selling their invoices to an invoice financing company.

Two more reasons why this myth persists:

1. Most branch-level banking personnel do not understand the invoice financing model and how it can benefit both their customers and their bank

2. Some Accountants mistakenly equate invoice financing with the type of "pennies on the dollar" transactions seen in a distress sale situation.

In truth, invoice finance is a financial strategy that can leverage the growth of a business. Furthermore, it complements a bank's relationship with its business customers by keeping money in the checking account. It can maintain the health of the business during times of stress (for example, during rapid growth or general economic constriction).

Myth #2: Invoice financing is just like a bank loan

Business owners (and sometimes accountants) confuse invoice financing with "borrowing" money – as with a traditional bank loan. In reality, invoice financing is nothing like a bank loan.

Below are three reasons why:

1. With a bank loan you "borrow" money that must be paid back, thus creating a "liability" on your books. Invoice financing is a "buy and sell" relationship: You sell an asset called Accounts Receivable. In essence, you are moving the asset value from the A/R column to your Cash column. There is nothing to "pay back."

2. A business loan through a bank involves two parties: you and the bank. Invoice financing involves three parties: you, your customer and your invoice financing company. Here's how the 3-party transaction works: When the invoice financing company (party 1) buys an invoice from you (party 2), they now own the right to payment. Your customer (party 3) is then notified to send the payment to the invoice financing company – not to you.

3. With a mortgage loan, the bank is most concerned with your credit rating. With invoice financing, the most important consideration is your customer's credit rating.

These three points make invoice financing a unique and highly flexible tool for accessing working capital.

Myth #3: Invoice financing is too expensive

Invoice financing is a cost-effective way to get funds for your business. Businesses should understand that the most expensive form of capital is equity. Raising additional equity to finance new growth or meet working capital needs often entails giving up a portion of ownership, and that can be very expensive.

Using invoice finance to fund new growth normally entails a slight reduction of profit (usually 1 to 3%) that's comparable to vendor discounting and generally outweighs the alternative of not taking on new business. Many companies see it as offering their customers a discount to pay early and getting all the bells and whistles that come along with the invoice financing service.

Invoice financing is flexible, accessible, produces fast results and doesn't require businesses to commit to a long-term program.

Myth #4: The fear that you will lose control of your accounts receivable

Of particular concern is the worry that the collections department of the invoice financing company will harass the customer for being a day late on their payments and using heavy-handed tactics which will ruin the relationship that has taken so long to build.

The truth is that the invoice financing company and your company share a common goal - to grow the business.

You can be assured that the invoice financing company will employ professional collectors who know how to effectively deal with almost any situation in a cordial and empathetic manner. The last thing the invoice financing company wants to do is alienate your customers. In many cases, you make the decision as to who will make the calls regarding delinquent payments.

For more information about invoice financing and whether it is ideal for your company, speak to one of the mortgage brokers at Intellichoice by calling 1300 55 10 45. We have access to over 20 mortgage lenders in Australia and will do all the research and legwork for you. We can then tailor a business finance solution to suit your needs.