Business invoice financing is on the rise in Australia. It’s becoming an increasingly popular way to release precious cash flow. It’s one of the 10 small business loan options available to SME’s.
Invoice factoring – what is it?
Invoice factoring, also known as ‘accounts receivable finance’ or ‘invoice finance’ or simply “factoring”, is a type of business finance that can offer a quick boost to your cash flow.
The factor will then collect payment from your customer and pay you the remainder of the receivable, keeping a percentage as their fee.
Are there different types of factoring?
| Recourse Factoring | In recourse factoring, the risk remains with you – if your customer doesn’t pay their invoice, you will have to buy back the receivable from the factoring company, and chase up the bad debt yourself. |
| Non-Recourse Factoring | If you opt for non-recourse factoring, you sell the debt and the risk to the factor. Once the transaction is done, the factor is responsible for pursuing the debt. Unsurprisingly, you can expect to pay higher fees for non-recourse factoring. Not every factor will offer it, and it’s likely that it will only be offered for invoices where your customer has a solid credit record.
You may also come across ‘whole ledge’ vs ‘spot factoring’. With whole ledge factoring you are required to sell ALL invoices relating to a particular company to the factor. Spot factoring, or ‘single invoice discounting’, allows you to pick and choose which invoices you want to sell, giving you much more flexibility (often at a higher cost). |
How does factoring work?
| The factoring process is very straightforward. Once you’ve sent an invoice to a customer, you send a copy to the factoring company, who will verify the invoice to make sure you supplied the goods or services listed. | They will then send you the agreed percentage as an advance, usually within 24 hours. Once your customer has paid their invoice, the factor will deduct their fees and send you the remaining funds (the ‘rebate’). |
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 Send your customer your invoice |
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 Send the invoice to the factor company |
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 Factor company checks the invoice and verifies the service was completed |
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 Customer makes payment and the invoice forwards you the last remaining portion minus fees |
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The factor advances you a large portion of the invoice |
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 Customer makes payment and the invoice forwards you the last remaining portion minus fees |
Who offers invoice factoring?
When it comes to choosing a provider for invoice factoring, you have a wide range of choices. Both the high street banks and an ever-growing number of alternative finance providers – including online ‘fintech’ lenders – offer it as a service. These online lenders will offer other SME’s finance options like a line of credit or unsecured business loans. However several of these lenders specialise in invoice factoring, including some that offer complete flexibility with single invoice finance.
How do I choose a provider for invoice factoring
Be aware that fees, terms and conditions vary considerably, and that alternative lenders are not subject to the same kind of regulations that the big banks have to adhere to – so shop around before you decide. Some lenders will require you to sign up for a long-term contract, while others allow more flexibility – but may charge you more for it.
Take the time to understand how to apply for business finance and what to watch out for.
The most important thing to look for is transparency. Be sure you know exactly what fees, penalties and restrictions will apply before you sign up for any long-term contract, as well as how the factor goes about collecting the debts. Remember that their conduct could impact on your relationship with your customers.
How much does invoice factoring cost?
The fees will vary considerably between lenders. There are also several other factors that will have an impact on the cost you pay for each invoice:
- The creditworthiness of the customer
- The volume of invoices you are factoring
- Your industry / business model
- The payment terms – you’ll obviously pay more for an invoice that is due in 90 days than one payable within 30.
You can expect to pay a ‘factoring fee’ which is a percentage of the invoice amount. This will generally be somewhere between 1.5% and 4.5% per 30 days outstanding. There may be other costs such as admin charges and money transfer fees.
Invoice factoring example
| Invoice value | $10,000 |
| Fee (3%) | $300 |
| Initial advance (85% of invoice value after fee) | $8,245 |
| Remaining advance (12%) | $1,455 |
| Total received | $9,700 |
Grow the business you want.
See if you qualifyWhat are the advantages and disadvantages?
There are some major advantages to factoring – primarily the impact on your cash flow. Getting a cash advance lets you cover the cost of doing business without making a dent in your working capital. However, there are some pitfalls to look out for too.
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How do I know if factoring is right for my business?
Given that around 90% of small businesses that fail do so because of poor cash flow, factoring can be an incredibly valuable resource.
It tends to be most beneficial to businesses that have to pay up front costs in order to do business. For example, if you have to pay for your raw materials, transport costs and wages before you’ll receive payment from your customer, factoring can give you the cash to cover those costs as they fall due.
It can also be of great benefit if you’re in an industry where customers expect long payment terms, or where offering longer payment terms can give you a competitive advantage.
As with any business financing decision, it’s important to seek professional advice before you enter into any factoring arrangement.
How do I know if factoring is right for my business?
Factoring is generally quick and easy to set up. Your business won’t be taking on any debt, so you won’t have to go through the rigorous application and appraisal process that you can expect with many other types of business finance.
You’ll need to complete a simple application form and supply supporting documents including:
- ID documents
- A list of your customers
- Copies of the invoices you want to factor
- An aging report for your accounts receivables, showing how long those customers generally take to pay
- Access to your accounting system
It usually takes around 3 – 5 days for your application to be assessed. Once you’ve been approved you can start factoring your invoices right away.
Use our calculator to see how invoice finance can help your business.
FAQ
What is invoice finance?
Invoice finance is a type of business finance that does not involve borrowing. Invoice finance allows a business to sell its outstanding accounts receivables (invoices) to a 3rd party at a discount.
How can I get invoice finance?
Invoice finance is a common form of business finance available from some fintech lenders and banks. You maybe able to obtain invoice finance if you have credit-worthy customers that pay you within your credit terms.
What does factoring mean?
Factoring is a type of debtor finance. A factor is a third party that finances outstanding accounts receivable (i.e. invoices). The factor will buy the invoices at a discount, and then collect the full invoice amount from the customer.
How much does invoice finance cost?
The cost of invoice finance can vary, depending on the factor and your customers. However, as a guide you could expect to sell your invoices for a discount of 1.5-10%, depending on the credit terms.
