Invoice discounting is a type of short-term finance which allows a business to gain access to instant funds secured by their accounts receivable ledger. This helps solve cash flow issues, as they don’t have to wait 30+ days for payment. Unlike factoring, the lender is usually not disclosed to a business’ customers.
A shortage of working capital is a serious problem for most businesses. Cash flow problems are a headache for almost 50% of Australian companies. With credit terms on invoices up to 90 days, being able to secure funds against them provides an instant boost.
Invoice discounting is often known by other names, including invoice finance, accounts receivable finance or debtor finance.
These terms in fact describe the broader category of which discounting is a specific type. Invoice discounting is very similar to factoring, with a couple of key differences which we’ll explore in this article.
How it all works
It generally works like this:
- During the application process, the lender will review your sales ledger. They’ll look at the number and concentration of debtors, their creditworthiness and the age and value of invoices.
- Based on this, they’ll advance you a proportion of the ledger value, usually around 75-85%.
- Once the outstanding invoices have been paid, they’ll then remit the outstanding balance, minus their fees.
- The limit will grow with you - as more invoices are raised, more funds are available - no further application required.
Types of invoice discounting:
- Confidential - this is the most common form of invoice discounting, where the facility is not disclosed to a business’ customers.
- Disclosed - alternatively, there are finance facilities where the arrangement is known to customers.
- Selective - funds are usually raised against the entire accounts receivable ledger. However, selective invoice discounting allows individual invoices or customers to be selected instead.
Factoring and invoice discounting
An alternative to invoice discounting is factoring. Both offer funds secured against the accounts receivable ledger. They share many of the same benefits. Quick cash flow, no fixed assets as security, relatively fast and simple application process. But there are a few key differences:
|Invoice Discounting||Invoice Factoring|
|You remain in control of credit control and collections||The factoring company manages credit control and collections|
|Suited to / available for larger businesses, with less need for admin help||Suited to / available for smaller businesses, who may need help with their bookkeeping|
|The accounts receivable ledger is not sold, but funds are drawn against it||The accounts receivable ledger is sold to the lender|
|Clients are usually unaware of the need for finance||Clients are usually aware of the need for finance|
|Cheaper than factoring||More expensive than discounting as it includes additional services|
|Customers pay the business as usual||Customers pay the factor|
|Business stays in control of client relationships||Factoring companies can interfere with precious client relationships|
|More risky for lender as no contact with debtors||Less risky for lender as they manage collections|
|Almost always involves the entire invoice ledger||Can be full ledger or single invoice factoring|
The pros and cons of invoice discounting
|Improved cash flow, allowing you to fulfil orders, pay staff, cover operational costs and grow||Whilst it is cheaper than factoring, it is still expensive compared to other forms of finance|
|It grows as you do. As more invoices are raised, the amount available increases||Unlike factoring, no admin support (although this is an advantage too)|
|Fast funds - often the business receives funds in 24 hours||Often unavailable to smaller businesses|
|Doesn’t require any fixed assets as collateral||The entire ledger is usually funded, rather than individual invoices or clients|
|You stay in control of credit and collections|
|Lender does not interfere with your client relationships|
|Can take the form of a line of credit, allowing businesses to draw and redraw endlessly|
The Waddle Difference
Waddle is not discounting. We’ve built an innovative invoice finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.
Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.
It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital with minimal fuss. Get an offer now!