How invoice factoring aids the financial effects of COVID-19

April 30th, 2020

Understanding how an invoice factoring facility can be beneficial for mitigating the negative impact of the coronavirus pandemic.

There are always challenges that business owners have to navigate in order to maintain their success and profitability. The global pandemic that has sent shockwaves through the business community is one such challenge, and an unprecedented one at that.

However, with the right tools, and a savvy attitude, various shop fronts have been able to maintain their cash flow to stay afloat, despite the economic hurdles. And services, such as those provided by invoice factoring companies, have been a crucial component in achieving this for many businesses.

There are a few key factors that may assist in identifying whether this service will suit your business. By identifying any potential commercial pitfalls associated with COVID-19, and explaining some of the invoice factoring services on offer, you may be able to see whether invoice factoring will suit your business’ needs.

The challenges of COVID-19

COVID-19 has had a significant economic impact upon companies across the globe, to varying degrees in various places. Therefore, to distil down the financial effects it has had on different businesses is difficult, without overly generalising. 

However, we can safely say there is a singular, pervasive issue affecting business owners around the world: maintaining a positive cash flow. Not only may COVID-19 have made sales volatile for you, but also for those who supply you or engage your services, resulting in payment lag and dwindling liquidity. 

Working capital and cash flow are the base upon which each business survives. You need to ensure that you can pay your utilities and staff, maintain any debts, and be flexible in how you operate. All of this requires a steady flow of accessible cash into the business. If a business owner senses cash flow is down, a natural reaction may be to be more aggressive in their pursuit of those in debt to them; customers or other businesses owing a credit on their account.

However, putting the squeeze onto those who owe an outstanding invoice to you may not be the most ideal solution, especially considering the conditions faced by everyone at the moment. You don’t want to run the risk of damaging your customer relationships.

If your business is experiencing financial difficulty, so may theirs be. COVID-19 has had ramifications for businesses of all sizes. This is where the services of an invoice factoring facility can come into play.  

Invoice factoring explained

Invoice factoring is a type of business loan whereby you effectively sell your unpaid invoices to a third party provider. This provider pays you a percentage of the invoice value upfront (usually around 80%) and collects the payment from your customers themselves, forwarding the remaining 20% to your business upon client payment (minus a fee). 

Your payment terms and how much you will be charged will depend on a number of finer details outlined in the agreement between the creditor and your business. These may include: 

  • How long your business has been trading
  • Your annual turnover
  • Your business’ credit rating
  • Who takes on liability in the event that the creditor is unable to pay. 

Invoice factoring is usually a quick and easy form of business finance, with a straightforward application process. And once approved, most businesses can access the working capital tied up in their accounts receivable ledger within as little as 24 hours.  

Through this system your business, and those in your supply chain, can potentially get a bit of breathing room. You get the cash you need to cover your overheads, without pressuring your debtors - who may be experiencing hardship themselves - into paying ahead of time. This convenience can make invoice financing companies, such as Earlypay, a useful tool in the belt of any business.

Finding the right balance

As cash flow problems can be one of the most notable issues caused by COVID-19 for businesses, and we understand that invoice factoring services can be useful in this regard, the key now is finding the right balance to suit your particular needs. You will need to make a few decisions when it comes to choosing the right factoring service for your business:

1. Confidential or disclosed factoring

Factoring is generally disclosed meaning that your customers are aware that there is a factoring company supporting your business. This is a function of the service that the invoice factoring company provides as they will often assist in managing the collection of your outstanding invoices and that's made easier if the debtor is aware. Outsourcing the collections function is one of the key benefits of factoring as it frees up resources in the SME to be used elsewhere. Factoring companies are also experts at collecting invoices so the results are often better too. All that said, it is also possible to have confidential factoring where your customer is not aware that there is a factoring company involved but this is often reserved to more established businesses and often those that have the resources to manage collections themselves.

2. Fee structures

There are also different fee structures to consider:

  • An Admin fee structure is appropriate for active and ongoing users of the factoring finance facilities. This fee type is often based on the amount of invoices raised each month and then the business can access funds as required without additional cost. 
  • A Drawdown fee structure is well suited to businesses that like the flexibility of having a facility to access funds if required but aren't active users and don't want to pay an ongoing fee. This can work out more expensive that an Admin Fee structure for active users but is less expensive when finance is required only sporadically. 

3. Spot factoring or whole ledger factoring

It’s also a good idea to assess the amount of credit that would be beneficial for your business. 

  • Spot Factoring allows you to factor your invoices on a one-by-one basis, with higher fees per invoice, but no lock-in contracts.
  • Whole ledger factoring is a contractual agreement whereby you finance your entire accounts receivable ledger as a business line of credit. This form of factoring generally has a lower cost.

It may be worth assessing how frequently you’re likely to be in cash flow trouble in the short to medium term when considering which option is more viable for you.

COVID-19 has been a significant challenge to Australian businesses, but it need not be an overwhelming one. So long as you can keep covering your bills and staff costs, and offering your goods or services, you can maintain hope of not just surviving, but thriving into the future. All it can take sometimes are a few key tools.

If you think that your business could benefit from invoice factoring, please sign-up at our website, call us on 1300 760 205 or speak to your broker or BDM.


If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].