What is invoice finance and why could it be right for you?
There are a lot of terms thrown around when companies start talking about invoice finance: ‘Free up cash flow’; ‘Unlock your receivables’; ‘Factor your debtors’. But what is invoice finance and what does this actually mean for you as a business owner? Invoice finance, is, at its core, a way for businesses to access finance or funding to grow your business.
What does invoice finance actually involve?
As with our guide to supply chain finance, there are a few key terms that you need to be familiar with:
Invoice finance refers to the process of selling an invoice to an investor at a discount in order to receive the cash now instead of the 30-120 days when the invoice matures.
Seller refers to the company or business owner that is looking for finance by selling their invoice.
End-debtor refers to the company being invoiced by the seller, and who would typically pay the seller upon receiving goods or services.
Investor refers to a private investor or investors, who in Timelio’s case are part of our investor network, and who will fund the invoice.
While it can seem quite complex, invoice finance is quite a simple process, and with Timelio it occurs in the following way:
- The seller completes an online application on Timelio’s platform. This is a simple process that takes about 10 minutes. This process can be made even quicker and simpler by linking your accounting software (Xero or MYOB), however this is not mandatory. There are no costs involved in setting up an account, and there are no obligations to use the service if you do.
- Once the account has been set up and approved, a seller can then upload invoices to the marketplace. Timelio will conduct a due diligence process on both the end-debtor and the invoice itself, and once verified will approve the invoice for sale on the marketplace. This due diligence process is kept confidential from the end-debtor.
- Investors will place bids to fund the invoice using an auction model. This ensures that the seller receives a competitive and market-related cost of finance. Once the auction closes the following business day, Timelio will transfer the money to the seller. The seller will have the funds within 24 hours of the sale of the invoice.
- Once the invoice becomes due, the end-debtor pays the invoice as per usual into a Timelio nominated account. Timelio then distributes the money to the investor or investors who funded the invoice.
Why is this better than a bank overdraft or a loan?
Invoice finance with Timelio has a number of benefits over obtaining a loan through a bank or online lender:
- The seller does not need to provide any collateral. That’s because the invoice itself acts as collateral. So no putting up your house just to fund your business.
- There isn’t a risk of over-extending borrowings and ending up in a debt trap. When using invoice finance, funding can only take up to the value of a sale which has already taken place. Unlike other lenders, Timelio will advance up to 100% of the invoice value.
- Overdrafts and loans have a host of hidden charges often levied under the guise of “admin fees”. Furthermore, line fees are typically charged regardless of the amount actually drawn down. At Timelio, fees are transparent and only charged on the amount of funding obtained.
- The cost of finance is driven by the credit quality of the end-debtor. Sellers are thus able to obtain competitive rates regardless of their size and trading history.
- Most loan providers require businesses to have at least 1-2 years of trading history and a minimum turnover. Timelio has no such thresholds and can provide funding to newly formed businesses who don’t have any trading history. Loan providers (and even other invoice finance lenders) typically impose a maximum facility limit which can restrict growth. We can fund invoices of any size and there is no overall limit. The facility grows as the seller grows.
- With Timelio, there is no contract period and no exit obligations. Sellers are free to fund as little or as much as they want and can stop using the facility at any time and at no cost.
Are there any restrictions?
Like any funding, invoice finance on Timelio does come with some limitations.
- The seller must have sales made on credit terms (such as 30 or 60 days). Invoice finance is thus only available to businesses who make sales to other businesses.
- You can only fund the amount that you have invoiced. Invoice finance thus works best when used by businesses looking to grow.
- The end-debtors need to be typically larger corporates or government customers. This requirement isn’t applicable where the seller has a debtor insurance policy in place.
- You need to fund a minimum of $10,000. It’s possible to bundle smaller invoices to meet this requirement.
All-in-all, invoice finance is a great option to use if you’re a business looking for funding to grow. If invoice finance sounds like the solution for your business, get in touch with our Growth Manager David Webster (email@example.com or 0490 228 953) to discuss your needs.