Is invoice finance right for your business? Six tests before you apply

Invoice finance gets pitched as a cure for cash flow. Sometimes it is. Other times it’s a rather expensive way to carry a problem that sits somewhere else: thin margins, a customer who disputes everything, or a bank facility that was already enough.

Before filling in any application, run the business through the six tests below. Each takes minutes with your accounting software open, and together they tell you more than any brochure.

Test 1: Do you sell to businesses on credit terms?

Invoice finance funds money that other businesses owe you. If most of your sales are paid at the till, by card, or up front, there is nothing to fund.

It fits when you issue invoices with terms of 14, 30, 60 or 90 days to commercial customers. That covers labour hire, transport, wholesale, manufacturing, trade contractors, cleaning and security firms, printing, staffing and many professional services. It fits poorly for retail, hospitality, clinics and any consumer-facing service that is paid on the spot.

If you invoice both consumers and businesses, only the business invoices are usually eligible.

Test 2: Can your margin carry the cost?

This is the test that decides most cases. Take your gross margin on a typical job, then subtract the cost of funding at your customers’ actual payment speed, not their terms.

Here is the method:

1. Pick a typical invoice. Say $30,000.
2. Work out your gross margin on it. Say 22 per cent, or $6,600.
3. Ask a provider for the total fees in dollars if that invoice is paid on day 30, day 60 and day 90.
4. Subtract each from the margin.

If the funding cost eats a quarter of the margin at day 60, that’s workable. If it eats three quarters, you are working for the financier. And if the business has a net profit margin of 3 per cent, a single slow payer can erase it.

Use the invoice finance calculator to see how cost rises with days outstanding, and read how invoice finance works for the fee structure.

Test 3: Is slow payment the real problem?

Invoice finance fixes timing. It doesn’t fix profit.

Ask yourself what would happen if every customer paid on the due date tomorrow. If the answer is “we’d be fine,” the issue is timing and invoice finance is a candidate. If the answer is “we’d still be short,” the business is spending more than it earns, and an advance will only postpone the reckoning with added costs. Our guide on how to fix a cash flow problem fast helps tell the two apart.

A related question is whether you can speed up the money yourself, with the cheaper steps first:

• clearer terms on quotes and invoices
• a deposit or progress payment on large jobs
• an early-payment discount, if your margin allows it
• a system for reminders that starts the day an invoice goes overdue

How to manage slow-paying customers covers these. Some owners find that tightening credit control solves half the problem for nothing.

Test 4: Are your invoices clean and your customers sound?

Financiers lend against the customer’s ability to pay as much as yours. Look at your ledger the way they will.

Feature	Helps funding	Hurts funding
Customers	Established companies, government, a spread of names	One customer making up most of the ledger
Invoice type	Delivered goods or completed services, accepted by the customer	Progress claims, retention, unaccepted work
Age	Within terms, or under about 60 to 90 days	Well past due
Disputes	Rare, resolved quickly	Frequent, or open
Contra	None	You also owe the customer money, so the amounts offset
Relationships	Arm’s-length	Related-party or associated entities

Concentration is the one to watch. If a single customer owes you 60 per cent of the ledger, many financiers cap what they will advance against that name. That can leave you with a facility that looks big on paper and is small in practice.

Run an aged receivables report and sort it by customer and age. That one report answers most of this test.

Test 5: Does your bank already hold the receivables?

Most small business bank loans and overdrafts come with a general security agreement over everything the business owns, receivables included. A second party can’t take first-ranking security over the same assets without the bank agreeing.

So before applying, check what’s registered against your business on the PPSR (a search is quick and inexpensive), and read your bank documents for restrictions. Then call your bank. There are three possible outcomes:

• The bank agrees to a priority arrangement, often a deed, and the invoice financier takes receivables.
• The bank offers its own invoice or debtor facility. Banks can be the cheapest option, so take that offer seriously if it does what you need.
• The bank declines to co-operate, which may mean refinancing everything with the invoice financier or choosing a different tool.

Find out early. Discovering the conflict after you have chosen a provider wastes weeks. See the PPSR glossary entry for background.

If you’re unsure how your existing security sits with an invoice facility, tell us what the bank holds and we’ll flag any likely snags.

Test 6: Are there cheaper or simpler alternatives?

Sometimes the answer is yes. Compare honestly:

Option	Strength	Limit
Bank overdraft or line of credit	Often the cheapest; flexible	Limited by your security and the bank’s view
Term loan	Predictable repayments	A lump sum for a one-off need, not a rolling gap
Selective invoice funding	Only fund the invoices you choose	Higher cost per invoice than a full facility
Supplier terms	Stretching what you owe costs little	Strains supplier relationships if overdone
Trade finance	Pays suppliers, often overseas, before goods arrive	Suited to importers

Our comparisons of invoice finance versus an overdraft and debtor finance versus a business loan take these head to head. If your problem is a single large order rather than a continuing gap, a short-term loan might fit better than a rolling facility.

A worked example: three businesses, three answers

Illustrative only, using made-up businesses.

A commercial cleaning contractor invoices offices and strata managers monthly on 30-day terms but is paid at around 55 days. Gross margin is 28 per cent. Payroll is weekly. There are 30 customers and none exceeds 12 per cent of the ledger. This business passes all six tests. The funding cost is a modest slice of the margin, and the cash timing gap is real.

A café group wants invoice finance because suppliers are pressing for payment. Nearly all income is card sales. There are no invoices to fund. The right look is at supplier terms or a working capital product.

A civil contractor has $400k owed on progress claims, but 70 per cent is on one council contract with 60-day payment and a retention clause. Several claims are awaiting certification. Much of the ledger isn’t eligible, and the bank holds a general security. The contractor will need to resolve the bank position and may find only a fraction fundable. Another route might fit better.

Same product, three different answers. That’s why testing before applying matters.

What if the answer is “not yet”?

Not passing doesn’t mean you’re stuck. Some fixes are short:

• Diversify the customer base so no name dominates.
• Tighten invoicing so work is accepted and signed off before the invoice goes out.
• Clear the dispute backlog.
• Talk to the bank about priority or its own facility.
• Improve your margin on slow-paying accounts, perhaps by pricing the cost of credit into quotes.

Come back with a cleaner ledger and you’ll face better terms.

Getting a straight answer for your numbers

You can spend a week gathering quotes and still not know whether the structure suits you. A shorter route is to describe the business: what you sell, how invoices are paid, how much is outstanding and what the bank holds.

Our form takes around a minute, and leaves your credit file untouched because there’s no credit check at the enquiry stage. Your details stay with us rather than being fired off to a pile of providers. A real person reads your situation and calls to talk it through, including whether invoice finance is the right answer or whether something simpler would do.

The more accurately you fill in the customer mix and your payment times, the quicker we can point you to the right option the first time.

Check if invoice finance fits my ledger →