Everything you need to know about why you should be refinancing, and how to do it.
If you're pulling your hair out as you try to understand the end of financial year reports from your invoice finance provider, you might be thinking, "Does it really have to be this difficult?!" Well, the good news is that modern invoice finance providers have embraced technology to make invoice financing simpler than ever before.
Like a growing number of Australian business owners, you recognise the value of invoice finance as a way to release cash from your unpaid invoices. It's also likely that when you engaged with your traditional invoice provider it was accepted that invoice finance came with a lot of manual processes that couldn't be avoided.
Have you now transitioned your business to cloud accounting software but your invoice finance service is still stuck in the dark ages? If this sounds familiar, it's time to reassess your options.
Modern invoice finance providers now have easy-to-use platforms that integrate with your cloud accounting software like Xero, MYOB and Quickbooks saving business owners time and money. There has never been a better time for Australian small businesses to consider your invoice finance alternatives and make the switch to a service that better suits the needs of your current business.
What type of invoice financing is best for my business?
Business owners should ask themselves if the type of invoice financing they chose in the first place is still relevant to their business.
There are two main types of invoice financing: invoice factoring and invoice discounting.
Invoice factoring
Invoice factoring is where you engage with a third party financier who also manages your accounts receivable and invoice collections. If you don't have the resources to manage this function inside your business, or simply would prefer not to do it so you can focus on other parts of your business, invoice factoring might be the best solution.
Invoice discounting
Invoice discounting, on the other hand, allows your business to access funds from unpaid invoices while continuing to manage your accounts receivable ledger and the collections process yourself. This is often the preferred method of invoice financing by businesses that can dedicate resources to this function and would prefer to maintain the direct customer relationships with no third party involvement.
Why it pays to refinance your invoice finance facility
There are always a thousand things to do as a small business owner and perceived barriers to finding a new invoice lender, such as doing paperwork and waiting on approval, can make it easy to put refinancing in the 'too hard basket'. However, the long-term benefits of refinancing often outweigh the short-term cost if you’re just willing to put in a little effort up front.
There are a range of reasons that a business may choose to refinance their invoice finance facility, including:
- Cloud accounting integrations. Old-school invoice factoring providers generally don’t integrate with your business’ cloud accounting software. You may want to refinance with a provider who streamlines your accounting and bookkeeping by automatically updating transaction information into your software. Modern invoice finance lenders like Earlypay integrate seamlessly with cloud accounting platforms like Xero, MYOB and Quickbooks, allowing real-time access to a borrower’s accounts receivable ledger, which is updated as invoices are raised and paid.
- Reducing interest. One of the biggest motivators for refinancing is to reduce ongoing costs, and the interest you pay on your business finance is often one of the biggest expenses. Modern invoice finance providers are often more efficient and have a lower cost base than traditional lenders and can offer you a lower interest rate, saving you hundreds, if not thousands, of dollars in interest each year.
- Reducing fees. Many factoring companies don’t provide transparent pricing. If you’re being charged through the nose for account keeping fees, late payment fees, same-day payment fees, misdirection fees or regular audit fees to name a few - you may want to consider switching to a finance provider with a more transparent pricing structure.
- Improving speed of financing. Depending on your current provider, the amount of time between you applying for finance and it being in your bank account may be a pain point. Modern invoice finance providers can turn approvals around quickly and often provide same-day funding on invoices, once you’ve been approved.
- Poor customer service. Too often in Australian banking and finance, a long standing relationship leads to the lender becoming lazy and complacent. If your lender's customer service is constantly disappointing and simply not up to scratch, it might be time to look for a lender that appreciates your business.
- Inflexibility. Your current invoice financing provider may have talked you into a lock-in contract, or you may find that they are generally inflexible when it comes to making any changes to the terms.
Steps to refinancing an invoice finance facility
1. Compare your options
Whatever the reason that motivates your business to refinance, you’ll want to ensure you do your research before you choose your next provider. This is why the first step you should take when refinancing is to compare your options.
How to compare invoice financing providers:
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Interest rates |
Low rates mean reduced ongoing costs and less cash flow out of your business. Be careful not to focus only on the interest rate though - with some lenders, interest savings are more than offset by higher fees. |
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Fees |
Some fees may be unavoidable, but the lower the fees charged, the lower your ongoing costs. |
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Ease of use |
There is more to the cost of invoice finance than interest and fees. As business owners fully understand, time is money, and streamlined processes let you focus on other parts of your business where you can add more value. |
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Apps |
Can the provider integrate with your accounting software, such as Xero, MYOB or Quickbooks? This can save a lot of time, reduce the risk of errors and generally make life easier. |
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Finance model |
Is the provider offering invoice factoring or invoice discounting? Who bears the responsibility for collections and other administrative tasks? Choose the appropriate structure for your business. |
2. Pros and cons
Once you’ve considered your options, you may want to pause and assess whether you’d actually be better off refinancing. Maybe you are already onto a good thing and it's not worth rocking the boat.
You will also need to consider potential break fees and you might need to wait some time before changing lenders to avoid this fee. Or you might be happy to pay the fee to get the transition done. This can be a matter of preference but it is an important consideration.
Equally, there could be upfront costs payable to the new lender that need to be factored into the cost of changing but this is often small if you are looking for a long term invoice finance arrangement.
If the lower cost, improved efficiency and improved customer relationships and/or improved invoice management service outweighs these costs, it may be worth refinancing.
3. Get your paperwork together
Modern invoice finance providers that link with your cloud accounting software don't require as much paperwork to be submitted as traditional lenders. Submitting ATO documents, sales contract information and ID documents will get you a long way towards obtaining approval.
4. Approval and settlement
After you’ve connected your cloud accounting software, provided the necessary documentation and applied for the new invoice finance facility, you will generally be approved (or not) within 48 hours. Upon approval you can be up and running with your easy-to-use modern invoice finance facility within 24 hours.
If you think that your business can benefit from modern invoice finance facility and would like to find out more, please contact our team today on 1300 760 205.
If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].