Why SMEs Shouldn’t Choose a Cashflow Lender on Price Alone


As small business owners or directors, we have all been there. We’ve won the clients; we’ve done the hard work or supplied the products; and now we’re sitting patiently waiting for funds to roll in – either to kickstart a growth initiative, pay our staff, or fund business as usual.

Delayed invoice payments affect every business but are felt most profoundly by small firms, who are owed on average $13,200 at any given time.

Unpaid accounts are more than just an inconvenience. They are a drain on resources – with the average company allocating five hours per week to chase them.

They can also lead to serious droughts in working capital, which, according to stats, is the primary reason that small businesses fail.

Firms hungry for working capital can secure temporary cash fixes through two main sources: cashflow lenders (such as banks) or asset-based lenders (such as invoice financiers).

Cashflow lending is where companies borrow money based on their projected future cash flow. Asset-based lending uses borrowers’ assets as collateral for the loan.

In invoice financing (a form of asset-based lending), your unpaid accounts are used for this purpose, in place of physical assets like real estate.

Though cashflow lenders can sometimes present a cheaper option there are often hidden drawbacks.

On top of that, there are hidden benefits of invoice financing. Here we outline a few.

Simpler to obtain and grows with your business:

Invoice financiers have the confidence and authority to loan you more, particularly if you have large sums of your cashflows tied up in accounts receivables, as many smaller firms do.

They look primarily at the strength of collateralised assets (spread and quality of debtors), and less at the company’s financial health and credit rating.

Leading invoice financiers in Australia can now also offer a fully digital online funding product that allows SMEs to focus on managing its cashflows and growing its business, instead of continually administrating a facility and regularly providing invoice paperwork to support requests for additional funds.

In contrast, given the risk involved, cashflow-based loans are often harder to obtain – relying more heavily on a company’s credit rating – and are typically smaller in value.

Also, since cashflow lenders typically underwrite their loans using a firm’s EBITDA (earnings before interest, taxes, depreciation and amortization), credit capacity and loan size is subject to the health of the overall economy.

For these reasons, cashflow-based loans tend to suit bigger companies who have a proven track record in generating large profits, consistently over long periods. Smaller companies often don’t have the cashflow, balance sheets or credit ratings to qualify for the loan size they want.

Greater Flexibility

Invoice financiers can offer a more flexible, less punitive, line of credit type facility secured purely against its most valuable business asset – its outstanding invoices.

Since they have a lien on the collateral, lenders will only collect the outstanding invoices (assets held) to repay any funding provided, as opposed to taking possession of personal assets to recover loans if cashflows are insufficient to clear debts.

In contrast, if you fall into financial hardship during the repayment terms of your loan with a cashflow lender, you may find yourself deep in hot water and hit with a host of financial penalties, which perpetuate your debt.

Streamlined monitoring & minimal restrictions 

Leading invoice financiers are now able to offer a fully digital funding product that directly interfaces with the SMEs Cloud Accounting software. This allows financiers to monitor funding accessed and asset security levels via its fully integrated online platform and client portal.

In contrast, loans via the cashflow lender channel are subject to strict financial covenants. These include ratios that a borrower is required to stay above or below, levels of debt or working capital.

If you violate a covenant it can trigger a default on your account and damage your credit rating, even if you are making repayments on time.

For SMEs using finance to offset lags in working capital, compliance with these covenants may be unfeasible and they may prefer to stick with an asset-based lender to avoid undue risk to their businesses.

If you’re an SME that struggles to maintain a healthy level of working capital, invoice financing could be for you.


TP24 offers a unique solution for SMEs in Australia. We provide a line of credit working in harmony with your software. Secure, flexible credit with limited admin. Get in touch today contact@tp24.com.au.

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