Types of Invoice Finance: Exploring Factoring, Discounting, and Selective Invoice Finance
What is right for you and your business?
Invoice finance is a versatile financial solution allowing businesses to access immediate cash by leveraging their accounts receivable. Businesses can choose from several invoice finance arrangements based on their specific needs. We will explore three common types of invoice financing in this chapter: factoring, discounting, and selective invoice financing.
Factoring is a widely used form of invoice finance that involves the sale of accounts receivable to a finance provider, known as a factor. The factor assumes responsibility for collecting payments from the customers, providing businesses with immediate cash flow.
Factoring is a widely used form of invoice finance that involves the sale or assignment of accounts receivable to a finance provider, known as a factor. The factor may or may not assist in collecting payments from the customers depending on the arrangement between the factor and client. This provides businesses with immediate cash flow.
Key Features of Factoring:
Funding Percentage: Factors typically advance around 70% to 90% of the invoice value upfront. The remaining balance, minus fees, is paid when the factor collects full payment.
Credit Control: Factors may offer credit control services and assistance, managing collections and helping manage credit risk, allowing businesses to focus on core operations.
Confidential or Disclosed: Factoring arrangements can either be confidential or disclosed. A confidential factoring arrangement does not disclose the factor’s involvement to the customer, while a disclosed factoring arrangement does.
Factoring can be structured as non-recourse or recourse. In non-recourse factoring, the factor assumes the risk of non-payment, while in recourse factoring, the business retains the risk and must repurchase invoices if they remain unpaid. Most factoring services in Australia are on a recourse basis.
Funding Percentage: In discounting, the finance provider typically provides an advance of around 70% to 90% of the invoice value. The business retains control over the collections process and is responsible for collecting payments from the customers.
Confidentiality: Discounting arrangements are often confidential, preserving customer relationships with the business
Direct Relationship with Customers: In discounting, the business maintains a direct relationship with its customers and is responsible for managing credit control, invoicing, and collections. This requires the business to have robust credit management systems in place.
Recourse: Discounting is typically structured as a recourse arrangement, meaning that the business retains the risk of customer non-payment. If an invoice remains unpaid after a specified period, the business is required to repay the advanced funds to the finance provider.
Key Features of Selective Invoice Finance:
Invoice Selection: Businesses choose individual invoices or a subset of accounts receivable for financing. In this way, they can select invoices with longer terms of payment or those from slow-paying customers.
Funding Percentage: Finance providers typically advance around 70% to 90% of the invoice value.
Benefits and Drawbacks of Invoice Finance. Making Informed Decisions