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Definition
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Using outstanding invoices as collateral to secure immediate funding.
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Benefits
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Enhanced cash flow, no debt incurred, scalability for business growth.
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Types
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Factoring, Asset-Backed Lending, Supply Chain Finance.
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Choosing the Right Lender
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Banks have the cheapest funding but highest standards, 2nd tier lenders allow for tax debt and specialist lenders provide facilities to those with bad credit.
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Application process
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Offer secured after a review of financials, lender due diligence includes reviewing business paper trails (eg proof of delivery) and direct credit file assessment
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Maintaining a sufficiently healthy cash flow is the definition of success for business. For businesses billing on invoice after work is completed receivables finance – also known as debtor finance or factoring – is an important solution for businesses who need to recognise their revenue while waiting for the customers to pay their invoices. In this article we will step out the features and benefits of receivables financing so you can determine if it’s the right solution for your business.
Key Takeaways
| Aspect | Key Takeaway |
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Understanding Receivables Financing
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Unlock immediate working capital by leveraging unpaid invoices.
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Benefits to Business
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Improved cash flow, reduced waiting time for payments, and enhanced financial stability.
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Types of Receivables Financing
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Exploring factoring, asset-backed lending, and supply chain finance.
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Choosing the Right Option
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Insights on selecting the best receivables financing solution tailored to your business needs.
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What is Receivables Financing?
Receivables financing, often important for businesses awaiting payment, is a line of credit businesses can access by using their outstanding invoices as security to access immediate funding. The advantage of receivables financing over other lines of credit, like an unsecured overdraft, is the available credit and limits available can be significantly higher than what otherwise might be offered. By turning invoices into immediate cash, businesses can sidestep the usual wait for customer payments, injecting much-needed liquidity into their operations.
Benefits of Receivables Financing for Australian Businesses
| Aspect | Benefits |
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Enhanced Cash Flow
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Provides an immediate boost to cash flow, crucial for meeting operational expenses and capitalising on growth opportunities.
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Debt-Free Financing
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Unlike traditional loans, it doesn't incur debt, keeping the balance sheet healthy.
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Scalability
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As sales increase, so does the potential for financing higher limits, making it an ideal solution for growing businesses.
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Choosing The Right Lender For Your Receivables Financing
Receivables financing is offered by a variety of lenders including a few of the big 4 banks, 2nd tier banks, large specialist invoice finance providers and specialist lenders who focus on providing loan facilities to business owners with bad credit.
Many of these groups fund each other with major banks having funding lines that support some invoice finance specialists and in turn those invoice finance lenders supply the credit lines to the smaller lenders who focus on bad credit.
This layering of funding means there is considerable difference between the cost of receivables finance, as every lender will build in their costs and profit margin along the way. For this reason the cheapest receivables financing is usually supplied by the banks, then the invoice finance lenders and the most expensive funding is from the lenders who focus on subprime lending.
Banks and the leading invoice finance providers provide fixed monthly fees as opposed to the standard service fees that are linked to turnover that most receivables financiers charge. The benefit of the fixed model is your finance costs don’t rise if you’re business turns over more money. A good way to think of how this works is like the line fee on an overdraft, which is linked to the size of the limit. It’s our expectation that an increasing number of business owners will choose a line of credit with this fee structure once they understand how it can lower the cost of funding in a growing business.
Like most commercial lending the highest standards are expected from the banks and lenders that offer the best value. Banks will be seeking businesses that have an established history of profitable trading, no outstanding tax debt and invoices that are supported by good processes that avoid disputes. Invoice finance lenders will welcome businesses with outstanding tax debt provided directors have a clean credit history and are of a good character.
Application Process for Receivables Financing
The application process for receivables financing usually consists of a review of YTD management accounts, financials, current aged payables and receivables and a review of your business’ ATO tax portals. This information is enough to generate an indicative offer and we’re able to secure these in a short period of time, often within 24 hours depending on the lender.
Once an offer is accepted the due diligence process will begin. This will involve a submission to credit and an in depth review of paper trails (purchase order, invoice, proof of delivery and remittance paperwork) and contracts. For construction businesses, typical receivables finance will not be offered where contracts have set off clauses, retentions and liquidated damages clauses and finance for this kind of business will need to be secured from a lender who specialises in progress claims finance.
Banks typically take at least 4 weeks to move through the due diligence process. Other invoice finance lenders can complete due diligence within a few days if you can link your accounting software to their platform but many take at least a few weeks to move from signed offer to settlement. Applicants can speed this process up significantly by responding to requests for information quickly and having good process around paperwork.
Dark Horse Financial is An Expert In Receivables Financing
Receivables financing represents a strategic tool for Australian businesses seeking to bring their revenue recognition forward and access the available credit in their accounts receivable. By understanding its benefits, and the various options available, companies can make decisions that aid cash flow and support them through growth periods.
To get the best structured finance at the lowest possible cost lender selection and negotiating the right fee structure for your business it’s important to appreciate the alternative methods lenders use to present their product. darkhorsefinancial.com.au are experts in receivables financing and lines of credit for business. To talk to an expert for your needs.
