Almost any business owner is able to relate to the problem of clients taking forever to pay but suppliers wanting their money immediately. They end up with accounts payable people knocking on their door while they are chasing or waiting on payment from their own clients, often for 60 days or even more.

It can be tempting to explore the option of a business loan to cover a cash flow shortfall but invoice finance is usually a better solution. Take a look at the difference between the two.

invoice finance vs business loans

1. What is a business loan?

A business loan delivers a quick cash boost or line of credit. To take one out, the business owner (or their loan broker) needs to apply to a lender and await a response.

While a business loan can be arranged quickly in many circumstances, it is capped at a set amount (usually around $100k). If a business needs more money, it’s a matter of going back to the lender to submit a new request. This takes time and can be stressful if the request is rejected.

Unlike an asset or equipment loan that can be used to pay for new machinery or equipment, a business loan is usually unsecured. Because of this, it is not easy to secure a good interest rate. As a result of taking out a high-interest rate business loan (which may be as much as 26 per cent), the business gets the short-term financial fix but can end up in an even deeper hole because of the expensive repayments.

2. Invoice finance

Invoice finance is a totally different arrangement from a business loan.

With this, a business has an ongoing relationship with a lender that is far more flexible and cost-effective. The business only needs to set up an invoice finance arrangement one time and the amount of money accessed as part of the arrangement can change as needed.

Here’s an example of how invoice finance works:

How Trevor uses invoice finance

‘Trevor’ runs a nursing agency that sends temporary nurses to fill in at hospitals and aged care homes across Melbourne.

He has a contract with a major aged care provider and sends several temporary nurses to its facilities per day. His monthly bill is over $400,000.

The challenge is the aged care provider has 60 day payment terms, but the nurses on his books will only wait a maximum of two weeks to be paid. Every month, Trevor ends up wondering where to find the money to pay the nurses, not to mention his other bills. He could take out a loan, but he doesn’t want to end up handling monthly repayments or to have to spend time comparing interest rates and submitting an application.

Instead, Trevor chooses invoice finance. His broker helps him set up an account with a provider and then he uses Xero to prove he has invoiced for work that has already been done. Because there is a very high chance he will be paid and the amount is over $25,000, the lender is happy to have Trevor as a client.

Under the arrangement, when Trevor issues an invoice to his main hospital client, his lender pays 80% of it within 24 hours, with no questions asked. This gives him the cash he needs to pay his staff. At the end of 60 days, the client pays the bill and he receives the balance, minus the lender’s (very minimal) fees and charges.

With invoice finance, it doesn’t matter how much Trevor invoices. He may experience a surge in demand over Christmas which means his bill is triple. Thanks to the flexibility of his arrangement, it is no problem to rapidly receive this amount of money (up to $2 million). The next quarter, things could be quiet, to the point where he does not have to use his invoice financing option.

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a success story

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Invoice finance makes more sense than a business loan

For a cash flow solution with a lower interest rate than a business loan and the option to ‘grow’ together, invoice finance is an excellent option. This solution acts like an unlimited overdraft and can take a great deal of the stress out of operating a business. There is no need to make repeat applications for cash and the fees are far lower than with a traditional business loan.

Want to find out more? thornmoney provides invoice finance to a range of Australian businesses. Get in touch today.

Disclaimer: This information is for general information purposes only. Therefore, the information contained herein does not constitute financial or professional advice or a recommendation. Ultimately, it has not been prepared with reference to your financial circumstances or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice as to whether or not this information is appropriate for you.