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Invoice finance is a common form of business finance in Australia, where a business will sell its invoices to a third-party company (a factor) who in return will advance a large portion of the invoice amount to the business.
It doesn’t require collateral and the amount you can borrow will be equal to the value of your invoices (minus the factor’s fee).
Shopping around for the right loan can save you thousands of dollars in interest and fees.
Invoice finance — also known as accounts receivable finance, or factoring — is a type of business finance that allows a business to sell its outstanding accounts receivables (invoices) to a third party for a percentage of the total invoice amount. It allows a business to access funds quickly, without taking on a business loan that will accrue interest.
Invoice finance is known as ‘factoring’. A factor is a third party that finances outstanding accounts receivable (invoices). The factor will buy invoices from a business, then collect full payment from the customer and pay the business the remainder of the invoice, keeping a pre-agreed percentage as their fee.
Invoice Finance in Seven Simple Steps:
|Invoice amount||Factor fee (3%)||Advance (85%)||Remaining (12%)||Total finance|
The amount you can receive from invoice finance will depend on the value of your invoices and the willingness of the factor to take them on. In general, most factors will advertise a maximum amount of $1,000,000 although some lenders offer a maximum amount of $100,000,000.
Invoice finance is often available either as recourse or non-recourse factoring, and through a whole ledger factoring or spot factoring agreement. You can see how these work in the tables below.
|Recourse factoring||Non-recourse factoring|
|You sell the debt but the risk remains with you The factor is responsible for pursuing the debt If your customer doesn’t pay their invoice, you will have to buy back the invoice from the factoring company, and chase up the bad debt yourself Most factors will offer it||You sell the debt and the risk to the factor. The factor is responsible for pursuing the debt. You can expect to pay higher fees for non-recourse factoring. Not every factor will offer it It’s likely that it will only be offered for invoices where your customer has a solid credit record.|
|Whole ledger factoring||Spot factoring|
|You are required to sell all invoices relating to a particular customer or company Low flexibility Lower rates||Allows you to pick and choose which invoices you want to sell High flexibility Higher Rates|
Invoice finance uses a ‘factor fee’ — a percentage of the invoice amount, and will generally be between 1.5% - 4.5%. The factor fee is the amount taken by the lender in return for their factoring services. Factor fees will vary depending on the lender, the agreed invoice financing term, the volume of invoices you are factoring, and more.
There are also other considerations specific to your business and customers, including:
Advance fees — if your company is financially secure, you’ll likely receive a rate around 3%. However, if a lender has reason to believe your customers are at risk of not paying, they may increase this significantly.
Additional fees — transaction fees or early payment discounts applied to your customer invoices.
Penalties — each lender will have an individual policy around non-payment or late payment from your customers. It’s crucial you understand these to ensure you aren’t left with an unserviceable debt.
You can qualify for invoice finance if you operate a business that provides a service or product to customers without immediate payment — i.e. your business sends an invoice to customers.
While many different types of businesses can apply, it is often most beneficial to businesses that have to pay up-front costs to operate.
In Australia, invoice finance is often used by companies experiencing regular payment delays from customers, including:
Most lenders will be able to provide invoice finance if you have:
The process for setting up invoice finance is fairly simple. As your business won’t be taking on any debt, approval should be quicker than a standard loan application, and will often require less-exhaustive documentation. You’ll need to complete a simple application form and supply supporting documents.
Here’s what you may need to provide to a lender when applying:
If your factoring company using invoice discounting, then their collection method to customers will be anonymous. Generally, standard factoring will indicate to a customer that their invoices have been sold. Factoring companies will indicate which type of collection they use, so be sure to research carefully if this is a major concern for your business.
If you’ve sold your invoices to a factoring company and the customer accidentally pays you instead, it’s important that you indicate this to the factoring company as soon as possible. If you remain transparent in the process, you’ll maintain a healthy relationship with the factor.
Inventory finance can be a way to borrow against available stock and spread the cost of a purchase over a longer-term arrangement. The benefits of upfront payment vs long-term finance will depend entirely on your business circumstances. Since you’ll be using the inventory itself as security it can be easier to access than some other forms of business finance.
The factor will be responsible for collecting payment from your customers. However, depending on the type of invoice finance you agree to, you may be required to buy back any unpaid invoices from the factor and seek to collect payment from customers yourself.