Have a plan to bridge short term cashflow dips

Every business should have a contingency plan to deal with an unexpected dip in cash flow. While simply having a business overdraft available provides some degree of short-term protection, it’s best to have an array of lifelines at your disposal. Also, we find that the overdraft gets used for everyday purposes rather than for unexpected problems.

Peer-to-peer financing is another clever route to addressing temporary dips in cash flow. Conventional peer-to-peer financing involves online companies lending to businesses from funds gathered through a pool of investors. These loans are usually quicker and more straightforward than conventional borrowing and there is no minimum amount, so they are perfect for topping up cash flow. Beware: some offer much better value than others: don't be taken in by headline rates, do some calculations or check with your accountant.

Another smart take on peer-to-peer financing is an online improvement on invoice ‘factoring’, whereby a business in need of cash sells its ledger to a bank or another conventional lender. The online providers in this area of peer-to-peer financing, which include InvoiceX, will buy (for 1.5-3% per month) individual invoices – allowing companies to easily draw specific, limited amounts – but avoid the hidden fees, long contracts and slow decision processes of traditional factoring providers. For working capital spikes, this is often a better ongoing solution than a short term loan which can cause more cashflow problems a few months later. Importantly, watch out for whether your customer needs to be notified.

Why is invoice trading so different from conventional debtor finance?

We enjoyed reading a very useful article on Altfi recently which highlighted the leading invoice finance platforms in Australia.

Some important differences were highlighted:

First and foremost, it’s crucial to state the difference between invoice financing and invoice factoring, as they aren’t the same thing at all.

The former refers to borrowing money against businesses’ outstanding accounts receivables. An example helps to clarify the point. A lender gives entrepreneurs cash today in relation to the value of the company’s accounts receivables – money owed to the firm, which clients will pay in the future (hopefully). Once the clients pay up, entrepreneurs then repay the lender the amount loaned plus fees and interest.

The latter is a bit different. Indeed, in this case the lender “buys” the accounts receivables entrepreneurs are owed and takes over collecting from the clients. With invoice factoring, the lender will pay the business owner a percentage of the total outstanding invoice amount, then takes responsibility for collecting the full amount. Once they collect the full amount, they’ll advance entrepreneurs the difference, keeping a percentage for their services.

The main difference between these two forms of financing is obvious. In the first case, the business owner is still responsible for collecting outstanding money owed by his/her clients. In the second case, clients will deal with the factoring company to make their payment, not the business owner.

This usefully sets out some key foundations based on conventional debtor finance. During the early 1990s, 'invoice financing' or 'discounting' as described above developed into a major asset finance product for larger companies. In recent years, banks have steadily withdrawn from this segment due to the inherent risks and operational complexities.

Invoice finance is now seeing the development of a next generation product: confidential invoice trading. Over $2 billion of finance has been provided in this form in the UK alone, having started only 5 years ago.

This is a revolutionary new way of doing invoice finance, as pioneered by Marketinvoice in the UK since 2011 and adapted by InvoiceX for the Australian market since 2014. 

Confidential invoice trading opens up a broad market of high quality, growing businesses who are attracted to raising flexible growth capital confidentially on attractive terms. These companies are not attracted to factoring or invoice discounting.

  • Unlike factoring, our invoice trading solution is confidential. We are the only platform that offers this in Australia. We do not contact or chase the debtor for payment.
  • Unlike invoice discounting, our investors own the traded invoice. This is a much better place to be from a credit risk perspective. Our investors are not materially exposed to insolvency risk from the seller. Therefore, we can offer much better terms to SMEs and much larger facilities.

We are very excited as this form of finance opens up so many growth opportunities for many of Australia's most promising companies.