When to pick invoice finance over a business loan

Woman paying at counter.
Photo by Blake Wisz on Unsplash.

For both new and established businesses, managing cash flow can be a challenge. And if customers make a habit of delaying payment, you can find yourself stalling as a business, if not running into further trouble down the road. 

Invoice finance helps get around this problem by letting you borrow against the value of unpaid invoices. The amount of funding available increases as more invoices are raised, and decreases (along with the associated costs) during quieter periods.

Supply chain manager at Octet, Joe Donnachie says invoice finance can suit businesses across a range of industries - including transport, labour hire and manufacturing - but many remain in the dark about what it has to offer.

“It is not uncommon for fast growing businesses to be unaware that invoice finance is a viable option for them, as often it can be lost in the myriad of other finance solutions on the market,” he said.

So how can you know if invoice finance is a better fit for your business than a traditional loan? Here are a few things to keep in mind.

Is flexibility a priority?

Founder and CEO of Timelio, Charlotte Petris believes businesses don’t have to pick one over the other, but there are times where invoice finance might be the more suitable option. 

“A business loan is sometimes used in conjunction with invoice finance but, unlike invoice finance, a loan is capped and the loan size doesn’t fluctuate with cash flow demands,” she said.

This can sometimes wind up holding businesses back, particularly those which experience seasonality in demand and those that are (or could be) in a high growth phase and require additional cash.

“For these businesses it can be hard to accurately predict cash flow requirements and having a finance facility that is flexible and grows with the demands of the business is critical,” said Petris.

What about security?

When taking out a loan with a traditional lender, you’ll be offered either a secured loan (which requires you to put up property, vehicles or inventory as security), or an unsecured loan (which tends to come with a higher interest rate). 

Donnachie says collateral requirements can be a problem for businesses without physical assets, such as service-based companies or those that are just starting out.

“Depending on the stage your business is at, you may not have the assets available to do this. Even if you do, taking on a loan may not be the best move for your balance sheet,” he said.

“Invoice financing is an attractive and flexible alternative. By using your receivables as collateral, you can quickly access valuable cash without having to offer property as security and keep your balance sheet.”

The bottom line

Invoice finance is one way for businesses to address long delays between selling a product or service and receiving payment for it. According to Donnachie, invoice finance could suit businesses that have:

  • Long customer payment terms.
  • Seasonal sales cycles, in which cash flow fluctuates but costs remain consistent.
  • Strong demand but limited cash flow. 
  • A lack of physical assets to provide as security.
  • A desire to keep a healthy balance sheet.
  • A desire for early payment discounts.

For more information, browse our small business invoice finance guide.

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