Updated 12th July 2023

Small and medium-sized enterprises (SMEs) across Australia face various challenges in securing funding from traditional lenders. From financial criteria to extended payment times, there have been a variety of factors that have contributed to a 2.9-fold increase in the time taken to receive payments compared to the previous year.

Unlocking Capital with Invoice Discounting and Invoice Factoring

Invoice finance, which includes both invoice discounting and invoice factoring, allows businesses to access a valuable funding facility.

Instead of waiting for delayed and outstanding invoices from customers/clients to be settled, which can take up to 30 days or more, invoice finance unlocks the owed capital through a third party – a financial institution – and allows immediate payment and eased cash flow.

Who uses Invoice Finance?

Invoice finance is a beneficial funding solution for businesses that engage in business-to-business transactions and provide extended payment terms.

If your company faces challenges with accessing reliable working capital due to the delay between invoicing and receiving payment, invoice finance can provide a viable remedy.

Invoice finance facilities prove particularly beneficial for businesses operating in various sectors such as:

1. Manufacturing

Manufacturers often face cash flow challenges caused by delayed payments from buyers. Invoice finance ensures a steady flow of funds, allowing manufacturers to meet operational requirements without interruption.

2. Transport

Transportation businesses often experience uneven cash flow due to payment delays from clients. Invoice finance provides immediate access to working capital, enabling transport companies to cover expenses and invest in more growth.

3. Storage

Storage facility providers require consistent cash flow to maintain operations and manage overhead costs. Invoice finance ensures timely access to funds, enabling storage businesses to sustain their operations efficiently.

4. Wholesale Trade

Wholesale traders often face cash flow challenges caused by the waiting for payment from retailers or distributors. Invoice finance alleviates this delay, providing wholesalers with the necessary funds to continue operating smoothly.

5. Recruitment and Staffing

Recruitment agencies and staffing firms frequently encounter delays in receiving payment for their services. Invoice finance eliminates the wait, empowering these businesses to pay their employees and pursue new opportunities without hindrance.

What is Invoice Discounting and Invoice Factoring

Both invoice discounting and factoring leverage outstanding invoices to help small and medium businesses relieve their cash flow issues. Nevertheless, there are crucial differences between the two.

Invoice Discounting

Invoice discounting involves a finance company providing up to 85% of the invoice value upfront as a cash advance. When your customer pays the invoice, you receive the remaining balance less fees that are owed to the financial institution.

Invoice discounting allows businesses to retain ownership of the invoices due to them while still receiving a percentage of the total value as an upfront payment from the financial institution.

The responsibility to continue collecting payment from the owing customers or clients remains on the business itself, with the balance of capital released by the financial institution provided once all the invoices are duly settled.

Invoice Factoring

Invoice factoring is a funding facility where companies effectively sell their accounts receivable for up to 95% of the value of unpaid invoices upfront.

Once the invoices are submitted for factoring, the finance company takes on the responsibility of collecting payment from your customer. When your customers settle their accounts, you then receive the remaining balance of the invoice less fees for the services provided.

In contrast to discounting, a factoring arrangement is when a business sells its invoices to the financial institution. Again, an immediate payment is provided to the business in exchange and as per the agreed terms.

In this case, however, the financial institution now assumes responsibility for collecting payments from the customers or clients who owe money.

Which is better: Invoice Factoring vs Discounting?

Both types of invoice finance are valuable ways for businesses to quickly and easily access advanced payment. The pros and cons of each, however, may make one more suitable for your business than the other.

For a more detailed look at how these two financing solutions work, read our guide on How Does Debtor Finance Work.

Invoice Factoring: The Pros

1. Greater Accessibility

Invoice factoring is particularly accessible for small businesses and organisations without dedicated accounts and collections departments. The reason for this is because responsibility for debt collection shifts over to the third party.

On the other hand, invoice discounting leaves the onus of settling the outstanding invoices with the business. Therefore, qualifying for invoice discounting will normally require a reliable track record of timely invoice collection and/or an internal accounts department.

2. Higher Upfront Payment

Factoring typically offers a higher upfront payment. Businesses can often receive up to 95% of the value of their invoices immediately. 

In comparison, discounting provides around 85% of the invoices’ value upfront. The remaining balance (less fees) is released once the invoices are all settled. 

3. Requires Less Time and Effort

With your financial facility provider handling all credit control and payment chasing, your business is able to focus on operational management and growth of your business.

Considering that Australian businesses spend as much as 8 hours per week chasing payments (totalling 52 working days per year) that’s quite a significant time-saving.

4. Less Approval Criteria

An end-to-end invoice factoring solution covers your accounts receivables completely. This gives you protection against overextending with customers that may be unable to pay. Part of the discounting application process is credit checks on your clients. This helps you by making it more likely that future business will be done with customers who pay on time.

Invoice Discounting: The Pros

1. Greater Confidentiality 

With an invoice discounting facility your accounts receivable are not sold to the finance company. While your business will still need to handle the payment collection, your customers or clients won’t know anything about the invoice finance arrangements.

Factoring, in contrast, involves the selling of your outstanding invoices and the financial institution will be collecting payment directly. Consequently, your business won’t have the same level of confidentiality.

2. Lower Cost 

Invoice discounting generally incurs lower costs compared to factoring. Because factoring includes additional accounts management as well as the capital advance, there are higher costs and more criteria required to obtain approval. 

Invoice discounting facilities, by leaving the responsibility (and ownership) of the outstanding invoices with the business, don’t have to cover the costs of these additional services. 

3. Build Customer Relationships 

With the business itself responsible for collections and accounts, you may find it easier to build positive relationships with customers. Introducing a third-party – such as a lending financial institution – can complicate things, especially if you don’t choose a reputable finance company.

4. Better Future Proof Large Businesses

Discounting is typically highly beneficial for larger, more established and growing companies with an in-house collections team or one that is looking to build a team adept at settling outstanding invoices.

Which type of invoice finance is right for you?

Both types of invoice finance can help an SME to improve cash flow and better manage access to much-needed working capital. Whether you’re needing to speed up the cash cycle or reinvest in growth, both factoring and discounting can be viable options.

The right solution for your business in particular will depend on your unique circumstances, your business objectives and your needs.

Considering the pros and cons of each type, we recommend getting in touch with our lending specialists at ScotPac. They’ll be able to provide tailored expert advice as to which solution suits your business best.

Invoice Finance Case Study: Strait Brands

Strait Brands, a premium Tasmanian gin and vodka producer, approached our team here at ScotPac for funding solutions to support their national and overseas expansion plans.

Through flexible and tailored invoice finance arrangements arranged by our experts, Strait Brands effectively managed their cash flow effectively and overcame the financial burden of excise duty commitments.

With the new production and packaging facility set up, our client was able to position themselves securely for national distribution and exports and achieved significant turnover growth.

Our funding solution not only supported their business growth but also enabled them to offer preferential terms to customers, facilitating longer payment terms and fostering stronger relationships with wholesalers and bottle shop customers.

To read the full case study for Strait Brands, click here.

ScotPac: the experts in invoice finance flexibility

One of the key advantages of invoice finance is its flexibility. And one of the key advantages of choosing ScotPac is our 35-plus years of experience and expertise in providing tailored, flexible invoice finance solutions.

From selective invoice finance to cover unexpected expenses to a revolving line of credit secured against your accounts receivable, our experts can tailor multiple funding solutions to suit your business’s needs.

If you need help determining which financing solution is right for you, speak to one of our financial advisors today. With offices throughout Australia and New Zealand, there’s bound to be a local business funding specialist near you who can guide you through your options and help you access the most suitable funding solution as soon as possible.