In our last post we talked about some of the issues surrounding SME financing, post-Royal Commission. Since Commissioner Kenneth Hayne’s final report was released, SMEs are experiencing a decreased cash flow and more challenges in securing much-needed finance.
This is, in part, due to a more tightly-regulated, risk-averse and punitive lending environment, which requires loan applicants to jump through more hoops and hurdles, only to be (increasingly often) told “no” at the end of this ‘obstacle course’.
This is a significant problem, with some estimates suggesting that 80-90 percent of small business failures are the result of poor cashflow.
Enter invoice financing. Also known as debtor financing, receivables financing and receivables securitisation (to name but a few), invoice financing is a non-traditional approach to maintaining business liquidity. It allows SME’s to gain finance using their unpaid invoices as collateral, in place of more traditional assets like real estate.
Invoice financing is not a new concept, but it’s still significantly untapped and under-utilised. The 2017 FCI Review showed that the uptake of invoice financing in Australia was growing rapidly – with a 10 percent year-on-year increase between 2015-16 – but was still lagging behind other major economies in terms of GDP penetration.
In the UK, for example, the penetration rate was 14.6 percent, compared with just 3 percent in Australia. And the 2018 FCI Review wasn’t much better, showing a plateau in this growth, domestically.
So, why is the uptake of invoice financing so slow among the Australian SME community?
Well, if the 2018 FCI report is anything to go by, it’s just a matter of “Awareness and acceptance”.
With this in mind, we outline some of the key benefits of invoice financing and outline why more SME Director’s should consider this option when attempting to secure much-needed capital.
Cheap and low-risk form of short-term finance
Invoice financing provides businesses with a cost-effective alternative to unsecured, high interest credit.
Borrowers can access moderate amounts of capital by pledging their unpaid invoices to a financier.
They will typically pay a percentage of their accounts receivables as a fee for the service. But this generally equates to a lower amount than the average interest rate of an SME loan.
Far faster to access
The low-risk element of invoice financing means that applications can be processed far quicker than property backed financing options.
Most invoice financing applications are completed within 4 weeks, compared with a traditional bank loan, which could take 3 – 6months to be finalised. When you also consider that the average overdue invoice takes 26.4 days to be cleared, a move towards invoice financing becomes a bit of a ‘no-brainer’.
Further, our receivables securitisation software speeds the process up a notch.
This quick access to capital might just be your lifeline, helping you to avoid “death by cash flow”, when times get tough, or when big ticket expenses crop up out of the blue.
Greater borrowing power – and more likelihood of a ‘yes’
Aside from being a drain on labour resources (the average small business director spends 5 hours per week chasing unpaid invoices), outstanding receivables create somewhat of an unstable budget, in the eyes of a traditional lender.
But not in the eyes of an invoice financier.
Invoice financiers look at the bigger picture (the bigger picture being that Australian SMEs are owed $26 billion in outstanding invoices) – and are prepared to lend a sum of $80 billion on the basis of that figure alone!
If you are anything like the average SME, owed $20,000 from your debtors, invoicing financing could be a great option for you.
And with the use of our receivables’ software, lenders and brokers can get an even clearer picture of your borrowing power, giving them more confidence to loan you greater volumes of capital.
With that said, we hope to see more SMEs making use of this alternative financing option to stay afloat and keep pace with their global peers!
Tradeplus24 offers a unique solution for SMEs in Australia. We provide a line of credit working in harmony with your software. Secure, flexible credit with limited admin. Get in touch today email@example.com.