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.

Business loan comparisons on Mozo - rates updated daily

Search promoted business loans below or do a full Mozo database search. Advertiser disclosure.

Refine the list of business loans

Let’s help find you a great business loan...
  • Unsecured Business Loan

    A straightforward business loan with no hidden Lumi fees or charges. Speedy application and approval process with fast access to funds according to Lumi.

    Interest Rate
    Upfront Fee
    Funding speed
    from 9%
    -
    Within same day
    Details
  • Invoice Finance

    Increase cashflow by unlocking the power of your receivables with Octet’s Invoice Finance solution. Receive up to 85% of your debtor’s ledger with tailored facilities ranging from $100K to $12M.

    Interest Rate
    Upfront Fee
    Funding speed
    0% for the first 60 days, then rates starting from 6%
    On Application
    Instant on approval
    Details
  • Prospa Plus Business Loan

    Prospa uses risk-based pricing to determine your interest rate. They look at factors including your industry, years in business, cash flow, creditworthiness and the overall financial health of your business.

    Interest Rate
    Upfront Fee
    Funding speed
    Interest rates vary based on risk.
    3.5%
    from 24 hours
    Details
  • Boost Business Loan - powered by Business Fuel

    Get secured or unsecured business funding for up to $250K. For loan terms of 6 months to 2 years. No application or account keeping fees to pay. Minimum loan amount is $10,000. Get approval in 24 hours. Loans over $100,000 require security. Minimum annual turnover of $120K.

    Interest Rate
    Upfront Fee
    Funding speed
    from 14.00% p.a.
    Details on application
    From 24 hours
    Details

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.