Invoice discounting or invoice financing is a common form of debtor finance. However, unlike factoring, this is mostly used by large businesses.
You can get access to owed invoice funds within a business day or two. This can help manage seasonal and other cash flow fluctuations.
Many banks provide invoice discounting services. Find out how to qualify and how much you can borrow.
What is invoice discounting?
Invoice discounting is simply turning unpaid business invoices into cash. Technically, it isn’t taking on additional debt. That’s because you’re simply accessing money that’s been owed to your business.
Businesses are turning to invoice discounting because of its many benefits. The main benefits include an improved cash flow, flexibility, credit management and credit protection.
Please note that this is a funding-only facility. It may not be a good option if your business lacks good credit control.
Do I qualify for invoice discounting?
Generally, you’ll need to meet the following requirement to qualify for invoice discounting:
- Your business has a projected minimum annual turnover of $500,000. However, specialist lender can accept lower amounts.
- You must have a large number of debtors. A single or a small number of debtors is usually not acceptable. This is because it’s the equivalent of having all your eggs in one basket.
- Your invoices must not be older than 90 days. This is generally two months from the end of the month of their issue.
- You must have expertise in managing and maintaining your debtors ledger.
- Lenders prefer borrowers that can provide fixed assets as security against the loan. This is especially the case if you don’t have previous dealing with the lender.
- You must have a clean credit history. However, there may be some exceptions to this.
If you can meet the above requirements, it’s highly likely you’ll qualify.
How much finance can I get?
Most banks can lend from 75% to 85% of your outstanding invoices. However, depending on the strength of the business, you can borrow even more.
Banks prefer the diversification of risk. They like to see a strong business and a mix of customer and suppliers. If you have a strong business with low risk, you can even borrow up to 90%.
We have mortgage brokers that understand invoice discounting. We can help you prepare your application so you can borrow more.
You can speak with one of our mortgage brokers by calling 1300 889 743. You can also fill in our free online assessment form to see if you qualify.
What do I need to prove my income?
However, there are some exceptions to this. There are specialist lenders that can accept just the invoices as income evidence.
Please note that this assessment varies from lender to lender.
Do I need to provide a GSA?
Buying a commercial property generally requires you to provide a General Security Agreement (GSA).
However, you can avoid having to provide a GSA with invoice discounting if your loan is under $1 million.
In lieu of a GSA, invoice discounting applicants can provide a Guarantee and Indemnity or G&I.
This is a less formal agreement than a GSA (more of a handshake agreement) and means you have more control over how you meet your loan repayments in the event of default.
To explain, it means that the bank cannot immediately take hold of your commercial property or business assets as they can with a GSA.
Instead the handshake agreement is relying on the fact that:
- You’re in a good financial position.
- Strong equity in other properties.
- The loan is under $1 million which presents much less risk.
What’s the process for invoice financing?
The invoice discounting process isn’t very complex. You can apply for debtor finance after you’ve invoiced your clients. Once approved, you can have access to a certain percentage of your funds in as soon as a single business day.
Typically, you can handle the invoice collection process yourself. When your clients pay the invoices, you’ll receive the rest of your funds. However, you’ll need to pay a small fee to the lender.
Preparation is the key to success!
As with any business loan, you’ll need to prepare yourself before applying for debtor finance. If you have any underlying issues with the business, it needs to be dealt with.
There are businesses that apply to cover up or fix these issues. Banks know that this is only a short term solution. They may not approve your application if they discover these issues.
Invoice discounting isn’t really secured on any tangible asset. This is why your business needs to be strong. You’re more likely to qualify if you have history with the bank.
If you’re a new customer, you may need to have a security property. However, this may not be necessary if you have a very strong business.
Make sure your financials are ready and that you understand the business well. A good credit listing and knowledge of the cash flow can help you make a good impression.
Also, it may be a good idea to speak with your accountant before applying for debtor finance.
Invoice discounting FAQs
How is invoice discounting different from invoice factoring?
Invoice discounting and factoring are both forms of debtor finance. They are similar but there are a few differences between them. Please note that their benefits are essentially the same though.
Invoice discounting is generally used by larger businesses. Different lenders may have different requirements with the revenue. However, you’re typically required to have a revenue of $200,000 or more.
Factoring is mostly used by smaller businesses. Unlike invoice financing, the factoring facility is disclosed. This means your debtors will know that your business is using a factoring facility.
The main difference between the two is credit control. In factoring, the lender manages the sales ledger and collection of accounts. However, you can do this yourself when it comes to invoice discounting.
Why aren't invoice discounting fees published?
The costs of invoice financing depends on the application as well as the lender.
You’ll have to pay more if you draw more funds. Lenders also typically charge a management fee against the value of your invoices.
Invoice discounting rates and fees aren’t generally published because of their inconsistency.
How can a mortgage broker help me with this?
Securing debtor finance is tough for some businesses. This is because the loan is essentially unsecured and the business and suppliers must be very strong.
Although many banks offer these facilities, there are only a few lenders that specialise in invoice financing.
This is also very difficult for big banks and some may not even have it on offer. Applying the right lender is key to getting a great deal. This is where a mortgage broker comes in.
We have relationships with almost 40 lenders all over Australia. We also have brokers that specialise in invoice discounting and business loans. We can help you apply and get approved for debtor finance.
You can speak with one of our specialists by calling us on 1300 889 743 or by filling in our free online assessment form.