Invoice Finance Options - The Definitive New Zealand Guide to Invoice Factoring & Invoice Discounting

Our guide explains Invoice Finance's costs, pros, cons and alternatives. We look at Invoice Factoring and Invoice Discounting and detail what every small business needs to know.

Updated 11 January 2023

Summary:

With the cost of borrowing at recent highs driven by the Reserve Bank of New Zealand's decision to raise the official cash rate (OCR), many Kiwi businesses are taking a serious look at their cash flow to figure out whether they can continue to meet operating costs such as overhead and payroll.
While business loans are popular, one of the less-common options available to Kiwi businesses is invoice financing services, which can act as a short-term liquidity option for companies with unpaid invoices.
We've published this guide to help business owners understand invoice financing services, and explain invoice factoring and invoice discounting.
However, what terms you'll be offered will vary business by business. It can be confusing to compare the different fees, rates, and trade-offs compared to other forms of financing (such as small business loans, lines of credit, personal loans and other forms of business loans).
Invoice financing can be a useful tool for businesses of all sizes trading throughout New Zealand that need to improve cash flow and access working capital. However, while it can be a useful tool for companies with slow payment terms or that don't have access to traditional lending sources, it can also be more expensive than other forms of financing and usually involves fees and discounts which need to be factored in to your margins.
Our guide has been published to help businesses understand key terms and definitions, evaluating the advantages and disadvantages, and considering the potential risks and challenges, businesses can make informed decisions about whether invoice financing and invoice factoring is the right financial solution for their needs.
We also shortlist of the top invoice financing providers in New Zealand and list top facts you need to know and the most frequently asked questions.

Our guide covers:
X
X

Know This First: I’m concerned about cash flow. Should I use invoice financing or take out a small business loan?

When choosing between invoice financing and a small business loan, there are several factors to consider.
First, invoice financing is a fast financial solution that allows businesses to access funds secured by unpaid invoices almost immediately. This increased cash flow speed can be useful for businesses experiencing cash flow problems and needing a quick influx of working capital.
However, invoice financing does have some drawbacks, including the possibility of not receiving the full value of the invoices and the risk of becoming overly reliant on the financing.
Small business loans are another option for businesses needing to manage their cash flow. In the past, small business loans may have taken weeks to process, which made them less suitable for businesses with urgent cash flow needs, however online lenders are changing this and speeding up applications to help manage the ups and downs of cash flow. Overall, small business loans can be processed quickly, making them a viable alternative to invoice financing for businesses needing fast financing.
For a further breakdown of small business loans in New Zealand, check out our comprehensive guide and comparison.

What is Invoice Financing? How Does the Invoice Financing Process Work?

Invoice finance is a financial tool that allows businesses to borrow against the money due from their customers.
Invoice finance allows businesses to access funds from unpaid invoices almost immediately rather than waiting for customers to pay in full. This functionality can help keep the business running smoothly and maintain cash flow without waiting for customer payments.
Invoice financing allows businesses to bridge the gap between the time they issue an invoice and the time they receive payment, helping them to maintain a positive cash flow and grow their business, maintain working capital and pay time-sensitive expenses such as employee salaries and supplier payments. With big companies settings invoice payment terms as long as 60 or even 120 days, cash can otherwise take a long time to appear in a business bank account.
Invoice financing is a flexible and convenient way for businesses to access working capital, as it doesn't require traditional forms of collateral such as property or equipment. As a result, invoice financing is a popular option for businesses in various industries, including manufacturing, wholesale, and service-based businesses.

There are two main types of invoice financing: invoice factoring and invoice discounting. Both types of invoice financing allow businesses to sell their unpaid invoices to a financing company in exchange for immediate payment. We break down the key differences between invoice factoring and invoice discounting below:

Understanding Invoice Factoring vs Invoice Discounting

What is invoice factoring? How does the invoice factoring process work?

Invoice factoring is a financial solution allowing businesses to access funds secured by unpaid invoices.
To use invoice factoring, a business sells its unpaid invoices to a financing company (known as the factor) at a discount (usually 2% to 5% of the total invoice value). The factor then advances the business a percentage of the invoice value, typically around 80%.
When the customer's invoice is due, they pay the factor rather than the business. The factor then sends the remaining balance to the business, less their discount fees.
Invoice factoring allows businesses to access funds from their unpaid invoices almost immediately rather than waiting for customers to pay.

What is invoice discounting? How does the invoice discounting process work?

Invoice discounting is a financial solution allowing businesses to access funds secured by unpaid invoices.
Unlike invoice factoring, where the business sells its invoices to the financing company, invoice discounting allows the business to retain ownership of the invoices.
To use invoice discounting, a business sells its invoices to a financing company, which determines the percentage of the invoice value to lend.
The financing company then advances funds to the business as a line of credit or a lump sum.
When a customer's invoice is due, the customer pays the business rather than the financing company. The business then pays the financing company the amount advanced or used from the line of credit, plus any fees or interest.
Invoice discounting allows businesses to access funds from their unpaid invoices almost immediately while maintaining control over the collection process.

Why do businesses take out invoice financing?

Avoids debt: Invoice financing can be an effective way for businesses experiencing cash flow problems to access the funds they need without taking on more debt. Unfortunately, many businesses have cash flow issues, and a significant amount of invoices are paid late, making it difficult for businesses to pay bills, hire staff, buy inventory, or expand.
Fast money: In the past, businesses facing tight cash flow may have taken out a loan or struggled to get by without the necessary funds. However, invoice financing can be a faster and more flexible option. With invoice financing, finance companies will advance businesses a percentage of the value of their unpaid invoices, typically 75 to 90 cents on the dollar. This advance allows the business to access funds almost immediately, rather than waiting for the customer to pay.
Low fees: While fees are associated with invoice financing, they can be useful for businesses to overcome short-term cash flow issues. This can make it a cheaper solution than a business loan or line of credit.

Invoice Finance - Pros & Cons

Pros
There are several advantages to invoice financing, including the following:

Access to working capital: Invoice financing provides a quick source of working capital that can be used to meet short-term financial obligations or to fund business growth.
Access to funds without extending long-term debt: Invoice financing allows businesses to access the funds they're owed almost immediately, rather than taking on long-term debt such as a traditional loan. This access makes it a good shorter-term solution.
Flexibility in choosing the amount of funding needed: Online invoice financing companies allow businesses to choose how much credit they take out rather than requiring them to sell their entire accounts receivable. This flexibility allows businesses to stay in control of their credit needs.
Easy application process: Businesses can apply for invoice financing online through accounting software (such as Xero) without paperwork. Some providers even offer mobile apps that allow businesses to manage the entire invoice financing process from their mobile devices.
Streamlined bookkeeping: Some invoice financing providers automatically update accounting software, making it easier to track part payments and fees against each financed invoice.
Faster money when the company is experiencing a cash flow crunch: Invoice financing can provide a quick source of working capital to help a company meet its short-term financial obligations.
Faster money when the company's customers have slow payment terms: Invoice financing allows a company to receive payment for its goods or services much sooner than if it had to wait for its customers to pay the invoices.
Minimal personal risk (e.g. personal guarantees, collateral and credit checks): When the company doesn’t have access to traditional lending sources, invoice financing doesn’t usually require collateral or a credit check, making it an attractive option for companies that do not qualify for traditional loans.

Cons
There are also several disadvantages to invoice financing, including:

Cost: Invoice financing can be more expensive than other forms of financing, as it involves fees and discounts. This cost means Kiwi businesses won’t receive the full value of their invoices when using invoice financing, as the financing company takes a fee for its services.
Loss of control: When a company sells its unpaid invoices to a financing company, it loses control over the collection process.
Impact on customer relationships: The actions of the financing company may damage the business's relationship with its customers if the customers see the financing company as a debt collector.
Dependence on the financing company: A company that relies on invoice financing may depend on the financing company for access to working capital. This dependence can be a disadvantage if the company cannot secure financing from the financing company for any reason.
Lack of long-term financing: Invoice financing is typically a short-term financing solution, so it may not be suitable for companies that need long-term financing.

Credit risk: There is a risk that the company's customers may default on their invoices, which could result in losses for the company and the factoring company.
Confidentiality: Some companies may be concerned about the confidentiality of their financial information, as it is shared with the factoring company.
Legal issues: Legal issues may arise when a company sells its unpaid invoices to a third party, such as disputes over ownership or the transfer of liabilities.
Administrative burden: Invoice factoring may involve additional administrative tasks, such as tracking invoices and communicating with the factoring company.
Age of invoices: Financing companies may not be willing to buy very old invoices.

How Do I Choose the Best Invoice Financing Provider?

When choosing an invoice financing provider, asking questions and being aware of the product's details are important. Some tips and factors to consider when picking an invoice financing provider include the following:

Understand the fees: Look for providers that have transparent, easy-to-understand fee structures. Conversely, be wary of providers that use complex fee structures to hide high costs. Remember – the invoices are the lifeblood of your business, so you want to know clearly how much you’ll be paying for any financing service.
Know the finance model: Some providers offer a combination of invoice factoring, lines of credit (LINK), and payment plans. It's important to understand the specific type of finance being offered and how it affects the amount of money that can be advanced and when it needs to be repaid.
Consider the consequences of non-payment: Find out what will happen if the debtor does not pay the invoice. For example, will the client need to pay back the money, or will the provider assume the risk?
Selectivity: Determine if the financing company needs to control all invoices or if the client is allowed to choose which ones to finance.
Relationship management: Consider who will manage the relationship with the debtor. The invoice financing company may take responsibility for chasing unpaid invoices, which could impact the client's control over the relationship with their customer. It's also important to determine if the financiers will require the setup of a joint account with the client for receiving invoice payments from the debtor.
Compatibility with your accounting system: Consider whether the factoring company's systems are compatible with your accounting system to make the process as seamless as possible.

Reputation: Research the reputation of the factoring company and read reviews from other companies that have used their services.
Flexibility: Look for a factoring company willing to customise its services to meet the specific needs of your business.
Customer service: Consider the customer service the factoring company offers, including their responsiveness and willingness to answer your questions.
Industry expertise: Look for a factoring company that has experience working with companies in your industry and understands the specific challenges and opportunities you face.
Financial stability: Consider the financial stability of the factoring company, as you will be relying on them for payment.
Turnaround time: Consider the turnaround time for payment from the factoring company and how it compares to other options.

Banks and Lenders Offer Invoice Finance Services in New Zealand

Know This First: Currently, out of the largest banks in New Zealand, only the BNZ offer a bespoke invoice financing service to New Zealand businesses. ASB, ANZ, Kiwibank and Westpac do not offer typical invoice financing. However, ASB, ANZ and Westpac offer a variety of trade financing tools for exporters (which may include invoice financing). We suggest contacting your bank for more details.

In contrast to Westpac New Zealand, Westpac Australia offers invoice financing (see their offer summary). However, because Westpac offers invoice financing in Australia, it could suggest that Westpac New Zealand may roll out invoice financing to New Zealand businesses in future, given they're already offering the service in another country.
BNZ
CashFlow Plus is a digital invoice financing service offered by BNZ that allows businesses to access funds secured by their invoices and maintain control of their customer relationships. CashFlow Plus was launched in 2022 in partnership with Waddle (owned and operated by Xero). For more details, please refer to the media announcement of the service.
With CashFlow Plus, businesses can access up to 80% of the face value of their BNZ-approved invoices without relying on traditional forms of security, such as property. In addition, the CashFlow Plus dashboard allows businesses to access funds from anywhere in the world at any time, allowing them to grow their business and fund acquisitions, expansions, or management buy-ins or buy-outs. For a comprehensive video breakdown of how CashFlow Plus works, check out BNZ's YouTube video explainer.
Subject to the terms and conditions of the Facility Agreement. Establishment and purchasing fees will apply when using BNZ’s CashFlow Plus service. For a comprehensive table of BNZ’s current rates, fees and penalties on their invoice financing, find the latest information here.
Several other companies offer invoice financing services in New Zealand, including:

Must-Know Facts about Invoice Finance

Invoice Financing is a useful tool, but it isn't always the best option.
Invoice financing can be a valuable tool for businesses facing short-term cash flow issues, but it is not always the best option. It's important to help businesses understand when invoice financing is appropriate and when it may not be the best solution. Businesses should not rely on invoice financing as a long-term solution to recurring cash flow issues. Instead, it’s important to address the underlying causes of the problems and develop strategies to prevent bad habits from forming.
The liability of “who’s on the hook” varies between each invoice financing provider.
When selecting an invoice financing provider, ask what happens if the customer doesn't pay. In some cases, the finance company may take a hit. In others, it may fall to you. Understanding who will take the loss if the customer doesn't pay is essential when negotiating with invoice financing providers. Negotiating who's liable for unpaid invoices could make the difference between profit and loss in the financial year.

What are the alternatives to invoice financing?
There are several alternatives to invoice financing, including:

Bank term loans: Bank loans are a traditional source of working capital, but they typically require collateral and a credit check.
Merchant cash advances: A merchant cash advance is a short-term loan repaid through a percentage of the company's daily credit card sales.
Purchase order financing: Purchase order financing is a financial service that provides funding to a company to fulfil a customer's purchase order. The financing company pays the supplier directly, and the company repays the financing company once the goods have been sold to the customer.
Accounts receivable financing: Accounts receivable financing is a financial service that provides funding based on a company's accounts receivable value. The financing company advances a percentage of the value of the accounts receivable, and the company repays the advance plus a fee once the accounts receivable are collected.

Frequently Asked Questions

Can I factor in all of my invoices?

It’s generally possible to factor most, if not all, of your invoices. However, some factoring companies may have minimum and maximum requirements for the volume and value of invoices that they will purchase. It's also important to consider the creditworthiness of your customers and the potential impact on your customer relationships.

Can I factor invoices that are already past due?

It may be possible to factor invoices that are already past due. Still, it will depend on the terms and conditions of the factoring agreement and the customer's creditworthiness. For example, factoring companies may require additional documentation or security for past-due invoices or charge higher fees and discounts.

Can I factor invoices that the customer is already disputing?

It may be possible to factor invoices that the customer is already disputing. Still, it'll depend on the terms and conditions of the factoring agreement and the customer's creditworthiness. Therefore, it's important to carefully review the dispute and consider the potential impact on your business before deciding to factor disputed invoices.

What is cash flow financing?

Cash flow financing is a financial solution that allows businesses to access funds secured by their expected cash flow. This type of financing is similar to invoice financing, but instead of selling invoices, the business receives a loan based on its expected cash flow. Cash flow financing is useful for businesses that rely on cash and need immediate funds to meet expenses they would not normally be able to afford.
For example, a party supply store might have the opportunity to buy a bulk load of balloons at a discounted price, but it must pay cash immediately. If the store does not have enough cash, it could get a short-term cash flow loan to cover the balloon purchase and repay the loan when it comes in.

H3

Related Guides: