According to Greg Charlwood, Managing Director, Australian Invoice Finance, late payment of invoices is a major problem for small-to-medium enterprises (SMEs) in the Australian transport and logistics sector, which can even lead to the closure of businesses in extreme cases. At the very least, it creates uneven cash flow, potentially leading to problems paying suppliers and staff, missed opportunities and falling behind in tax payments.
Research from illion, which provides end-to-end customer management solutions to clients in the many industry sectors, for the 2019 June quarter revealed that one third of Australian SMEs (which it defines as businesses with less than 500 employees) experience problems with late payment of invoices.
The problem becomes worse around Christmas and New Year, when clients and customers often shut down for an extended period after the Christmas rush.
The illion research showed that the transport industry experienced an average late payment time of 9.7 days. That’s almost six weeks that it takes transport companies to be paid, on average.
This is extremely problematic in an industry that regular weekly and monthly costs such as fuel and wages. The problem becomes worse when unforeseen costs strike, such as vehicle maintenance.
How can you protect your business from late payments?
Invoice finance (also known as debtor financing, factoring, cash-flow finance and invoice discounting) is simply a line of credit against the receivables of a business that helps smooth out uneven cash flow. It enables businesses to convert their unpaid invoices to cash by leveraging their accounts receivable, typically one of the largest assets on a business’ balance sheet.
Under the invoice finance process, up to 90 per cent of the value of an outstanding invoice is converted to cash, usually within 24 hours. Once the outstanding invoice is paid, the remaining 10 per cent of the value of the invoice, less a service fee of around 2 per cent, is paid to the company.
The invoice finance process
There are three main reasons why transport and logistics businesses should consider invoice finance for cash flow management. Firstly, the finance landscape has changed: there has been a significant tightening of lending standards by the ‘big four’ banks in the wake of the Hayne royal commission and businesses are finding it more difficult to rely on them for financing.
Secondly, as a result of increasingly tighter margins and subdued economic conditions, many transport and logistics businesses have encountered cash-flow shortages that have significantly impacted their operations and growth opportunities. And finally, SMEs don’t want to risk personal property to secure finance.
Unlike other forms of credit, invoice finance is based on invoices and does not require personal property such as the family home as security.
An invoice financing facility may also include a sales ledger management service that can issue statements on a regular basis, handle cash allocations, collect outstanding payments and maintain detailed accounts of a business’ transactions. This can help small businesses reduce costs and free up management time to focus on strategic issues and business development.
It’s a good idea to speak to at least a couple of invoice finance providers prior to signing a contract to ensure that partnership is a good fit. Clients should also be prepared to answer questions from potential invoice finance providers such as:
- What type of business are you in? – Invoice finance providers often prefer to deal with businesses selling a product or service which can easily be shown to have been provided e.g. by a signed delivery note or timesheet. Transport and logistics are well suited to invoice finance in this regard.
- What debtors do you have? – Invoice finance providers will want to understand the quality and spread of a client’s debtors before entering into an arrangement. They will also typically enquire about a business’ bad-debt record, the age of the sales ledger and overall collection performance.
- How good is your record keeping? – Any provider of invoice finance will want to ensure that invoices can be easily followed through the collection process.