Invoice discounting is the most popular form of debtor finance in Australia.
Industry turnover is around $57 billion a year and growing.
There’s a very good reason for that.
Thousands of businesses understand that invoice discounting is a relatively quick and straightforward way to guarantee that their cash flow remains stable and strong.
Like factoring, this type of facility allows you to obtain funds secured by your debtors ledger, but unlike factoring, you are responsible for managing the credit and collection processes.
Facilities can be confidential (your customers don’t know you use debtor finance) or disclosed depending on the financier’s policies and its view of your company.
Confidential invoice discounting is slightly more expensive because the risk is greater, however the finance company will expect you to have good credit management in place.
This type of debtor finance is best suited to larger companies with a high turnover and a good number of customers.
The finance company will want you to sign a long-term contract ensuring that all invoices issued during that period are available as security for the funds it has advanced.
Contracts can be from 12 – 24 months.
Generally, financiers will advance up to 80% of the value of a company’s outstanding invoices, but this can change fairly quickly if you lose a couple of big customers.
It’s called an increase in debtor concentration, meaning you’re money is owed by fewer customers. Finance companies don’t like this because it increases risk. If it happens the percentage amount of your advance may be reduced.
By receiving cash when a sales invoices is raised means your cash flow and working capital position improves.
You have cash available to take on new business and seize growth opportunities
You don’t necessarily have to tell your customers that there is a third party involved in your business.
You get to manage your own accounts and customers.
Invoice discounting costs you money, so reduces profits
It may impact on the businesses ability to obtain other funds because the invoice discounter will hold the book debts as security
If you become dependent on invoice discounting it may be difficult to separate from your financier when the time comes.