Opinion: Keeping the cash flowing

by 12 Mar 2018

Why invoice financing should be on every broker’s radar 

The invoice financing industry has grown rapidly in recent years and now provides a significant opportunity for savvy finance brokers to earn additional revenue from Australia’s more than two million SMEs.

There are other compelling reasons why finance brokers should consider invoice finance as a lending option for their business clients, beyond just getting a slice of this growing pie.

The major banks have tightened their lending terms and conditions, and many businesses are finding it more difficult to access loans through traditional channels.

Secondly, SMEs continue to encounter cash flow shortages, which significantly impact their operations and growth opportunities. According to the latest research by illion (formerly Dun & Bradstreet), only 66.9% of Australian businesses are paid on time, representing $27.9bn of outstanding debt.

The survey also revealed that the average late payment for Australian businesses is 12.6 days, which can leave SMEs struggling to meet tax obligations and staff salary and supplier payments, while wasting resources chasing outstanding invoices. In extreme cases, late payments can threaten the survival of a business. Young companies, between two and five years old, are most at risk from late payments and non-payments.

Finally, Australian businesses are increasingly reluctant to use property as collateral because they do not want to assume unnecessary risk. By learning what invoice financing has to offer and sharing this with their clients, finance brokers can help address these concerns in a way that benefits all parties.

What is invoice financing?

Invoice financing, also called cash flow financing or factoring, is the umbrella term for lending that is backed by a company’s expected cash flow, determined by the value of outstanding customer invoices for work done or goods sold.

It is a simple and effective way for SMEs to smooth out cash flow troughs. Benefits include 24-hour approval and quick access to funds, lending up to 85% of the value of outstanding invoices; and the fact that property is not required as security. The remaining 15% of the invoice value, less a fee, is paid when the client receives payment from their debtors. 

The Australian experience

The Australian invoice finance industry is small by international standards but growing rapidly. Research by challenger brand Australian Invoice Finance shows countrywide invoice financing volumes are equivalent to 3.9% of Australia’s GDP, compared to 19% in the UK.

The report by illion revealed that the ACT has the longest average late payment time in the nation at 15 days. It attributed this to the structure of the territory’s economy, as this is dominated by the government sector, which has been historically slower to pay suppliers than other sectors.

Western Australia saw a 4% year-on-year rise to 14 days’ late payment time due to the slowdown in mining sector investment. NSW businesses have an average late payment time of 13 days, while Victoria and Queensland both average 12 days.

In terms of sectors, the mining, retail and utilities industries have the highest exposure to late payments, with an average late payment time of 16 days. The manufacturing industry follows closely at 14 days, while in the communications, construction and wholesale industries the late payment time is 13 days.

Why is the invoice finance opportunity for brokers?

Cash flow management is a perennial problem for small businesses, providing considerable opportunity for finance brokers to diversify their income streams through invoice financing. Finance brokers have control over the extent they are involved in each transaction, placing them at the centre of the debtor finance supply chain. Remuneration for brokers includes desirable upfront and trailing commissions for the life of each deal.

When a broker refers a business to an invoice finance provider, it will be assessed on book debts rather than valuations and cash flow projections.

Any businesses selling goods or services to other businesses on credit terms (eg 30 days to pay from the invoice date) are invoice finance prospects. These include manufacturers, labour hire providers, logistics and transport operators, as well as wholesalers.

The key trigger for invoice finance is any shortfall in business cash flow. There are a number of warning signs, such as rapid sales growth, difficulties meeting creditor payments and statutory obligations, seasonal fluctuations in demand, and blowouts in debt costs.

While candidates for invoice finance are generally those looking to enhance cash flow, invoice financing is being increasingly used for non-traditional purposes, such as mergers and acquisitions, the sale of a business, shareholder disputes and even divorce situations.
 

Greg Charlwood
Managing director, Australian Invoice Finance

Greg Charlwood has been in the invoice financing industry for more than 30 years and founded two of Australia's major invoice finance businesses. He has twice been chairman of the Debtor and Invoice Finance Association of Australia and New Zealand and is a past director of the Turnaround Management Association of Australia.