Invoice finance explained
According to a 2016 British study, the average amount of time it takes for an invoice to be paid in Australia is 26.4 days – the slowest rate among 80 countries surveyed [CB1].
With an estimated 90 per cent of small business failures caused by poor cash flow, Australian businesses’ poor record on payments is having a major impact on the small business sector, with late payment compromising the competiveness of small business as well as adding to administrative costs, reducing the potential for investment opportunities and damaging business relationships.
Fortunately, for cash-flow squeezed businesses there is an alternative form of finance that can help manage cash flow fluctuations and provide a cash safety net for unexpected cash flow gaps. This form of finance is known as a line of credit.
“A line of credit can be useful for smaller businesses, who are doing work for large businesses with good credit ratings. The small business still needs to invest in materials or pay wages well before being paid by their clients. Larger companies tend to pay slower, at around 45 to 60 days, maybe up to 90 days, so they have a serious impact on the cash flow of smaller businesses,” says small business bookkeeper Wendy Thompson.
“The big four Australian banks have traditionally been very set in their ‘inflexible ways’ and they won’t take on risks a small business owner might take on. They only look at historical data from closed financial tax years and not at today’s current financial situation or new clients. This is why line of credit has become a growing industry.”
How it works
A Prospa line of credit offers eligible small business owners a revolving line of credit between $2,000 and $100,000 to use and reuse as many times as needed throughout a renewable 12-month term. Interest is charged only on what funds are used, whilst using it.
Prospa’s system contrasts with invoice factoring, where a finance company typically purchases invoices at a set percentage rate, typically between 70 to 90 per cent, and then collects the debt directly from those customers. Instead, Prospa provides a line of credit which is a safety net designed to give business owners the confidence to focus on what they love about their business without worrying about day to day finances.
Small business operators simply need to provide Prospa with access to at least six months of bank issued statements for Prospa to assess the creditworthiness of the business. Customers can access funds against unpaid invoices within one business day. All data provided is secured using advanced bank-level security and encryption.
“Businesses who have seasonal or large lump sum payments from customers in well established sectors could benefit from this. If they are fast growing businesses with cash-flow savvy business owners, who know how to manage their company’s money well, then this might be a useful way to purchase large items or inventory,” suggests Thompson.
Getting paid within a day instead of 30 or 60? For any tradie, it sounds too good to be true, but thanks to the latest technology, it is now possible.
Talk to Prospa about how a line of credit can address your cash flow worries and put funds in your pocket to pay your own bills, well ahead of schedule. Read more about line of credit here.
November’s Black Friday and Cyber Monday sales days are a good opportunity to ramp up trade and improve cash flow. Here’s how you can prepare.View more
A significant expansion of the instant asset write-off scheme has made it more useful than ever. Here’s what you need to know.View more
Subscribe to the Prospa Blog
Be inspired! Sign up to Prospa’s newsletter to receive tips, tools and small business success stories straight to your inbox.