Invoice Discounting vs Factoring: What’s the Difference for AU Businesses?

Invoice Finance is a flexible and scalable working capital solution that helps Australian small and medium sized enterprises (SME) access tomorrow’s payments today. Find out more about ScotPac’s Invoice Finance offering here.

Invoice Discounting and Factoring are both forms of Debtor Finance (another name for Invoice Finance) They both help unlock cash tied up in unpaid invoices, but they work in different ways and suit different types of Australian businesses.

Invoice Discounting lets you retain control of your sales ledger and collections, while the arrangement can remain confidential from customers.

Invoice Factoring allows your lender to manage collections on your behalf. This can reduce the admin burden on your business, but it also means your customers will usually know a third party is involved.

The right choice depends on your business size, cash flow needs and how much control you want to keep.

Why is Invoice Finance important?

Cash flow gaps are one of the most consistent pressures facing Australian businesses.

Standard trade terms, with 30, 60 or 90-day payment periods, can create significant cash flow gaps and place pressure on your ability to fund ongoing operations.

After all, you have delivered the work and issued the invoice. But when payment is delayed by days, weeks or even months, funding wages, suppliers and overheads can become difficult.

For many SMEs across Australia, the working capital solution they need is Invoice Discounting or Invoice Factoring. Both are useful but distinct forms of Debtor Finance that turn outstanding invoices into working capital.

What is Invoice Discounting, and how does it work for Australian SMEs?

Invoice Discounting is a confidential lending arrangement. This form of Invoice Finance allows your business to access money locked up in outstanding invoices earlier, while maintaining control of your sales ledger and customer relationships.

How does Invoice Discounting work?

• You issue invoices to your customers as normal.
• Your lender, such as ScotPac, advances you up to 85% of eligible invoice value.
• You continue to collect payment through your accounts receivable process.
• When your customer pays, you receive the remaining balance, less applicable fees.

The key feature of Invoice Discounting is that customers are generally not aware a third party is involved.

Which businesses does Invoice Discounting suit?

Invoice Discounting suits businesses with an established credit control process and strong debt collection procedures.

If you have a reliable customer base and the internal capacity to manage collections, Invoice Discounting allows you to maintain control of the process and keep your use of the working capital facility confidential.

What is Invoice Factoring, and how does it work for Australian SMEs?

Invoice Factoring is a form of debtor finance where the lender manages collections from your customers. It is a more hands-on form of Invoice Finance.

How does Invoice Factoring work?

• You issue invoices to your customers as normal.
• Your lender, such as ScotPac, advances you up to 85% of eligible invoice value.
• The lender manages collection of payment from customers.
• When your customer pays, you receive the remaining balance, less applicable fees.

The key feature of Invoice Factoring is that you do not need a robust accounts receivable department.

Which businesses does Invoice Factoring suit?

Invoice Factoring suits businesses that do not have in-house credit control capability or strong debt collection processes.

If your business is growing quickly and you would prefer to outsource collections in exchange for less administration, Invoice Factoring may be a good option.

It can be especially useful for small businesses, start-ups and companies in sectors like transport, recruitment and labour hire.

What are the real costs of Invoice Discounting and Factoring for Australian businesses?

Costs vary between providers and depend on the facility structure, invoice terms, debtor risk and level of support required.

As a general guide, Invoice Finance costs may include a service or facility fee, plus a discount charge on funds drawn. Factoring may cost more than Discounting because it usually includes collections support and debtor management.

For many businesses, the value of the Invoice Finance facility comes from what improved cash flow makes possible – reducing debtor days, taking on more work, paying suppliers sooner or accessing bulk and early payment discounts.

To understand the costs for your business, speak to ScotPac’s lending specialists.

Invoice Discounting vs Factoring: which debtor finance option is right for your Australian business?

The choice between these two products often comes down to three factors:

1. Control
2. Confidentiality
3. capability

Control

Do you want to maintain control over the debt collection process, or would you prefer to outsource it?

Confidentiality

Do you prefer customers not to know about your use of Invoice Finance?

Capability

Do you have internal accounts receivable capability to collect payment from customers?

Below is a summary of the key differences between Invoice Discounting and Invoice Factoring.

Ready to unlock the cash in your invoices? Explore ScotPac’s Invoice Finance solution.