Factoring Invoice Discounting for Australian Businesses

Recent trading conditions for many Australian businesses have encouraged the use of creative solutions for keeping the cash flow going. Factoring Invoice Discounting arrangements are worth considering, because they can usually be arranged without having to provide additional collateral. 

Most businesses are hanging on their cash for longer, which increases the cash flow funding gap for businesses which sell on credit terms.

The Cash Flow Funding Gap

The funding gap is a direct result of the time delay between spending on cost of goods or services, and selling costs, and the point later in time when the customer finally pays their invoice.

For businesses carrying high inventory levels, or where wages costs are a high proportion of each invoice, this increasing cash flow gap can quickly mount up. The obvious symptom of this lower cash balances. The consequences are delayed payments, and missed opportunities to take on additional work because the funding isn’t available.

Obtaining finance through the use of factoring and invoice discounting can help in this scenario, because the effect is to speed up the cash flow.

“Restoring” Working Capital

An invoice, or a group of invoices which might not be paid for another 30 or 60 days, can be sold to a financier, for an immediate payment of (typically) 80% of the invoice face value.

This 80% advance from an Invoice Discounting arrangement would normally represent the majority if not all of the costs in that invoice. Depending on your margin there may also be a some profit as well.

The effect of recovering these invoice costs can be dramatic, because it effectively “puts back” the working capital, restoring the cash which can then be used to pay bills, or to make the payments necessary to get the next project under way.

Invoice Discounting and Factoring – Advances and Fees – Terminology

If you’re unfamiliar with the territory, the terminology can be a bit confusing.

When we refer to “Invoice Discounting” or factoring, the “discount” involved is the fee charged by the financier. The Discount should not be confused with the advance.

The advance (typically 80%) is simply an instalment of the invoice payment, not the fee. Under and invoice discounting finance arrangement, when the customer has paid the invoice, the financier’s fee is calculated and deducted from the second and final instalment . If the first advance is 80%, the second advance will be 20% less the “discount”, or factoring fee.

So.. Factoring or Invoice Discounting?

Strictly speaking a “factoring” arrangement involves the financing of all a business’s receivables. For this reason factoring rather than invoice discounting is more likely to be used by larger businesses with turnover of $5 million or more.

Under such factoring arrangements, there is usually a minimum funding amount of $500,000 to $1 million and a minimum funding contract of at least 6 months, and collateral security is required, much like a bank loan.

For smaller businesses, invoice discounting or invoice finance (sometimes referred to as “spot factoring”) is likely to be more suitable, because the business can nominate which invoices to finance, and is not locked in to any amount or time period. The approval and processing time is also very fast, often as quick as 24 hours, and collateral real estate security is not required.

Invoice finance funding amounts can also be as low as $10,000, which puts it within reach of most small businesses.