We look at the truth behind common myths about invoice financing.
One of the hardest parts about running your own business – especially for new start-ups - is managing the stressful, and sometimes awkward, task of getting invoices paid on time.
Invoice financing, also known as receivables finance, or debtor finance, has always offered much needed relief to small business owners struggling with cash flow problems due to unpaid invoices. However, there are a few common misconceptions and myths around invoice financing that may act as a barrier for business reaching out for help.
Let’s debunk some of the most common myths right now.
1. Invoice financing is expensive
Some business owners may perceive this type of financing as expensive. However, when you consider that it's immediately boosting your short term cash flow and it’s often much more affordable than an unsecured business loan, it puts those fees or interest into perspective.
Providers will typically pay you around 80% of the invoice amount upfront as soon as your invoices are raised, with repayment instantly made once the invoice(s) are paid in full. Compared to costly long-term business loans with fixed repayments and high interest rates, this is significantly more affordable.
2. Invoice financing will hurt client relationships
You may be worried that invoice factoring is a lot like hiring a debt collector that will badger your clients so much they’ll never work with you again. However, this is simply untrue for many financing providers.
For example, while invoice factoring companies take over financial dealings with your clients, many invoice discounting providers don’t even require you to disclose to your clients that you are using an invoice financing facility.
For the provider to receive payment, they simply generate a business account in your company’s name that you share with your clients to pay into. And many other providers will have confidentiality clauses that state that they cannot contact your clients for money.
3. Invoice financing means giving away your whole sales ledger
Another myth is that you’re giving away your whole ledger to a third party. But not only are there typically confidentiality clauses in place, as mentioned above, you can also choose to only finance a single invoice, or a portion of your outstanding invoices to a financing provider.
The two main types of invoice financing are invoice discounting and invoice factoring. If you choose invoice discounting, you are able to keep control of your accounts receivable ledger. You are still solely responsible for ensuring your customers pay you, so your client relationships are protected and in your control.
4. Invoice financing involves lock-in contracts
Much like a business loan, invoice financing can be perceived as having lock-in contracts where you’re tied down for years at a time paying off a debt. However, invoice financing providers generally only seek repayments when your customer pays their invoice in full, so you’re given much needed breathing room around your repayments.
5. Invoice financing is only for failing businesses
Some business owners may perceive invoice financing as only for failing businesses, however this is also another misconception.
In fact, invoice financing may be the difference between a new business getting off the ground and being another failure statistic. This is because having a positive business cash flow in those early years is crucial to a company’s growth. After all, an invoice financing company is paying you your money that is already owed to you.
You’re not taking out a loan to keep your company afloat, you’re simply seeking the cash flow injection you are owed to support your working capital, so your business can continue to expand.
6. Invoice financing involves too much paperwork
A major barrier for any business owner seeking invoice financing is the perception of a mountain of paperwork. But nowadays invoice financing providers simply require proof of identification, a bank statement, ATO report and your credit score for your application – which is typically all online.
Getting paid is quicker than other forms of business finance too, with most providers able to approve and transfer funds in as little as 24 hours.
7. Invoice financing always requires assets as security
While some business loan providers may request property as security, typically debtor finance providers like Earlypay will use the invoices themselves as security. This seriously reduces the risk on you and your business of losing said asset if the worst were to happen.
8. Invoice financing is too hard to manage with my accounts software
A business owner may also believe invoice financing is going to make their bookkeeping way too complicated, especially when it comes to tracking part payments and fees owing on invoices. However, the advantage of using invoice financing over something like a business loan is that most providers are compatible with your accounts software.
The provider should be able to automatically update any payment information straight into your software, such as Xero, QuickBooks, MYOB and more.
By embracing the power of cloud accounting software, modern invoice finance providers like Earlypay are making debtor finance solutions more straightforward than ever before. If you'd like to learn more about invoice finance with Earlypay, please contact our helpful team on 1300 760 205.