3 things you should know about invoice payments and cash flow

Steady cash flow (aka paid invoices) is integral for the success and survival of a business, however, reliable and consistent cash flow has always been one of the greatest challenges.


By Luke Trickett

Steady cash flow (aka paid invoices) is integral for the success and survival of a business, however, reliable and consistent invoice payments have always been one of the greatest challenges, especially for small to medium businesses. The events of the past two years have only intensified this problem, with 70 percent of SMBs reporting difficulties in 2021 and 40 percent failing altogether due to poor cash flow.

Likewise, many business owners have compromised their personal finances due to cash flow challenges with a third of Australia's SMBs reportedly using their personal savings as a stopgap. So, how can businesses navigate these strange and unpredictable economic times?

Here are our top three tips to help your business avoid the pitfalls of invoices and the cash flow uncertainty that comes with them:

1. Choose a solution to help you better manage and track your invoice payments

Late or unpaid invoices is the biggest pain point for business cash flow. In fact, research from Xero shows that, on average, a staggering 53% of SMB invoices are paid late in Australia and most are owed an average of $38,000 each, totalling a whopping $76 billion of outstanding invoices. However, statistics from the 2021 SME Growth Index show that if SMBs never had to wait for payment, they’d hold an average 42.8% in additional working capital.

Undoubtedly, finding a solution to better access the funds owed to your business is one of the most important factors to consider. However, the type of solution you choose matters. When considering your options make sure you look for a service which is low risk, provides transparent pricing and ensures fast access to your funds.

2. Seriously consider risk alongside finance solutions

Business Credit Cards

While it might seem appealing to take the fastest or easiest option out of a financially difficult situation, it’s important to consider the long-term risks. Business credit cards are a financial trap for SMBs and business owners need to be extremely careful before relying on credit.

Many credit cards have high interest rates and limitations on how you spend, meaning businesses can get easily caught in a world of pain and debt. Likewise, if you fail to repay expenses on time, especially if cash flow is an issue, you’ll be stung with substantial additional fees.

Relying on credit cards is not a payment solution and will ultimately end up adding to your financial stress, rather than relieving it.

Invoice Financing

Invoice financing is an option for many SMEs, though it comes with its own set of risks. Essentially, this form of financing requires a business to borrow money against the funds owed by its customers. Invoice financing is a liability against your business, which requires you to pay fees and interest. The process also involves lengthy credit checks, applications and proof of your client base. And don’t be confused, invoice finance is not the same as invoice payment.

Using invoice financing companies can seriously damage your client relationships, as many conduct their own collections. However, there are some advantages over traditional business loans. As a revolving facility based on the value of the sales and with no fixed repayment period, SMEs have the flexibility to draw down and use it as cash flow demands. Despite this, make sure you carefully consider the risks surrounding your business liability before pursuing this option

Small Business Loans

It’s common for new businesses to consider a bank loan when faced with opportunities or difficulties. Depending on the business's financial situation, there are two different loan types you may consider which include a secured or unsecured loan. While unsecured business loans seem attractive, as they don’t require assets as security and are more accessible, they come with higher interest rates and fees. Secured loans, on the other hand, are harder to get but generally give you access to higher loan amounts. However, be aware that the business’s assets and likely your own, will be on the line should anything go wrong.

All loans come with an element of risk, and when that risk is your business and livelihood, you really need to weigh up whether it’s worth it. Credit can become crippling to a business, especially those that are early-on or those that have to consistently manage unreliable invoice payments. Established businesses, with less concern regarding the servicing of a loan, are more suited to this option.

3. Make a financial choice that fits your business model

There’s no one size fits all when it comes to cash flow solutions for SMBs. What suits one business may not work for another and finding the right outcome is integral to your survival and success. Ultimately, choosing an option that helps your business get paid when you want without leaving you with debt or liabilities is important.

Always remember the difference between payment and finance.

Look for services that allow you to get paid or access your money when you want. Aim for options that do not require extensive applications, with low costs and as little risk as possible.

One-off fees and zero interest providers typically ensure your business is being paid , without creating additional financial pressure. Likewise, services that take on all late and non-payment risks are ideal, so you don’t need to repay the funds should something go wrong.

At the end of the day, finding a payment solution that helps you build predictable and manageable cash flow will allow your business to take on new opportunities, expand and grow without being hampered by debt or cash flow issues.