Quick answer: Receivables financing is any funding arrangement where a business raises working capital against the invoices it has already issued but not yet been paid for. A financier advances an agreed proportion of an invoice as soon as it is raised, and is settled when the customer pays. And yes, it is the same thing as invoice finance. It is also the same thing as debtor finance, and factoring is one of its forms. The vocabulary is unusually crowded for a single product family, which is the main reason it is hard to compare offers. The mechanism underneath every one of those names is identical: money you have already earned, made available earlier.
If you have been quoted for one of these and are trying to work out what you were actually offered, start with the next section.
Receivables financing, invoice finance, debtor finance and factoring: what is the difference?
Mostly, there isn’t one. Three of those four are the same product under different names, and the fourth is a type of it. Simply put, Debtor Finance, also known as Invoice Finance, is a facility linked to and secured by your outstanding accounts receivable.
Here is the whole vocabulary in one place.
| Term you will see (as searched) | What it actually refers to |
|---|---|
| Receivables financing, accounts receivable financing | The category – any facility funded by unpaid invoices. |
| Invoice finance | The same category, and the more common name in Australia. |
| Debtor finance | The same category again – named from the debtors who owe you. |
| Invoice factoring, debt factoring, accounts receivable factoring | A facility type – the financier collects from your customers, who are aware of the arrangement. |
| Invoice discounting | A facility type – you keep the collections work and the customer relationship. |
| Selective invoice finance | A facility type – you choose which invoices go in, rather than the whole ledger. |
| Asset based finance | Broader – funds against debtors alongside inventory, property and plant and equipment. |
Two practical consequences. First, if you are comparing three quotes that use three of these words, you are probably comparing the same product, and the differences that matter are in the terms rather than the label. Second, when a provider changes vocabulary halfway through a conversation, that is usually habit rather than a change of subject, but it is worth asking directly.
Why does a growing business run out of cash while trading well?
Because trade credit puts distance between finishing the work and being paid for it.
You deliver, you invoice on 30, 60 or 90 day terms, and in the meantime you pay staff, suppliers and overheads, and you take on the next job. Your costs land at the start of that sequence. Your revenue lands at the end.
That gap does not shrink as the business grows. It widens, because each new order is larger than the one still waiting to be paid, and it is funded out of the same reserves. A business can be winning better contracts every quarter and still be unable to accept the next one. The profit is real. It is currently in the form of an invoice.
Receivables financing is the instrument that closes that distance.
How does receivables financing work?
Four stages, whatever the arrangement is called.
| Stage | What happens |
|---|---|
| 1. Facility set up | The financier assesses your sales ledger and the creditworthiness of your customers, and agrees the proportion of an invoice it will advance. |
| 2. Invoice | You deliver the goods or service, raise the invoice on your usual terms, and submit it to the facility. |
| 3. Advance | The agreed proportion is advanced to you. Funds can be available in as little as 24 hours from approval. |
| 4. Settlement | Your customer pays. The balance is released to you, less the facility fee. |
Stages three and four are separated by the whole of your customer’s payment term. That separation is the product. Everything else is administration.
The important structural point is that the facility is tied to your ledger rather than to a fixed approved sum. As your invoicing grows, the funding available grows with it, without a new application each time.
What are the types of receivables financing?
Four, and the difference between them is mostly about who does the collecting and how much of the ledger is involved.
- Invoice Factoring, also called Debt Factoring. The financier manages collections. ScotPac’s Debt Factoring team carries out all accounts receivable and collections activity, and that customers will be aware of the arrangement. Suits businesses without a dedicated credit control function.
- Invoice Discounting. You keep the collections work in house. ScotPac’s Invoice Finance team draws the line as the lender taking responsibility for collecting payment under factoring, and your company retaining control and responsibility under discounting. Suits businesses with an established internal collections team.
- Selective Invoice Finance. You choose which invoices to submit and how long you want access to the facility. You do not need to submit all of your invoices which is useful when one contract is much larger than everything around it.
- Asset Based Finance. A broader facility that funds against debtors alongside inventory, property and plant and equipment. ScotPac’s Asset Based Finance is a corporate and enterprise facility, with published eligibility of B2B operations and a minimum of 36 months in operation. Relevant if receivables are one of several assets you want to fund against rather than the only one.
Is receivables financing a loan?
Not in the way a term loan or an overdraft is.
No new money is being advanced against your future trading. The advance is settled by the payment of the specific invoice it was raised against, by the customer who owes it. You are collecting a receivable you have already earned, earlier than the terms allow. The money was always yours. The facility changes when you get it.
That difference is also why the product is available to businesses that would not clear the criteria for bank lending. Its assessment focuses primarily on your customers’ creditworthiness rather than your own credit score.
Two honest qualifications. How the arrangement appears in your accounts depends on how it is structured, which is a question for your accountant rather than your financier. And under a recourse arrangement, an unpaid invoice can come back to you, which is the next thing worth understanding.
Who carries the risk if a customer does not pay?
Facilities are structured in two broad ways, and this is the term most often skimmed.
- Recourse. You remain liable if your customer fails to pay. The financier carries less risk, and fees are priced accordingly.
- Non-recourse. The financier absorbs the loss on defined events, most commonly customer insolvency. Narrower than the label suggests, and priced for the risk transferred.
Those are market wide categories rather than product names. ScotPac does not designate its own facilities as either one. What it points to instead is Bad Debt Protection, an optional addition to its Invoice Finance solutions, which safeguards a business against bad debts arising from customer insolvency or inability to pay. You nominate the customers who account for a significant share of your turnover, and ScotPac sets limits using market intelligence. It also credit checks your customers before approving a facility.
Do not assume a facility transfers customer risk because it is marketed as reducing it. Ask which events are covered, what proportion of the debt is covered, and what is excluded.
Who is receivables financing for?
It suits businesses that:
- Sell to other businesses on standard trade credit terms, rather than direct to consumers
- Invoice at least $10,000 a month, in Australian dollars
- Have been trading at least six months
- Have creditworthy Australian customers, since the assessment leans on their standing more than yours
- Are growing, and are finding that growth consumes cash faster than it returns it
Limited companies, sole traders, partnerships and start ups are all eligible, provided they generate over $10,000 in sales every month. If you are early in trading, that is worth raising in the first conversation rather than assuming either way.
What receivables financing does not do
Worth being direct about the limits, because this is where expectations break.
- It does not make a slow customer pay faster. It changes when you receive the money, not when your customer parts with it.
- It is not always confidential. Under a factoring arrangement customers will be aware. If that matters, Invoice Discounting is the conversation to have.
- It does not suit every invoicing model. Businesses invoicing in stages, invoicing in advance, or invoicing consumers may not be eligible. If you bill on milestones, say so early.
- It is not free capital. The facility fee is the price of the time you are buying. A fair trade when the time earns more than it costs, and a poor one when it does not.
- It does not repair a margin that does not work. Finance changes the timing of cash. It does not change the economics of a deal.
How do you arrange receivables financing in Australia?
Banks offer receivables facilities, generally assessed against your balance sheet and often against property security. Non bank lenders tend to differ in how quickly they assess, how flexibly the facility can be structured, and how much weight they put on the quality of your sales ledger rather than the age of your business.
Invoice Finance facilities require no property or other assets as security, use the unpaid invoices themselves as collateral, and scale to $200 million. It has been funding Australian and New Zealand businesses for over 35 years. For structure, terms and eligibility, see the ScotPac Debtor Finance page or Invoice Finance.
Questions to put to a provider before you sign
These vary enough between lenders that a general answer is worth very little. Ask directly, and get the answers in writing:
- What proportion of each invoice is advanced, and what moves that figure up or down?
- If my customer does not pay, does the debt come back to me? Which events are covered, and what proportion?
- Will my customers be told the facility is in place, and what will they be told?
- Does the facility need to cover my whole debtor ledger, or can I choose which invoices go in?
- My bank holds security over my business. What consents between lenders will this need, and how long do they take?
- What does the facility cost in a month where I invoice very little? Are there minimum volumes, minimum fees or notice periods?
- What happens to a disputed invoice, or one that is part paid?
Turn the invoices you have already raised into your next order
If your own cash is covering the distance between delivering the work and being paid for it, that distance gets more expensive every time the business grows. The capital to close it is already on your ledger.
Speak to a ScotPac lending specialist about how your invoicing actually runs and which structure fits it.
