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Chasing up customers for payment can be a highly frustrating process. It’s important for businesses who find themselves in this position to know their options, which is where invoice discounting can come in handy. Find out more about invoice discounting and your other finance options here with Savvy.
|Lumi Unsecured Business Loan|
Boost your business with fast hassle-free funding from Lumi. Apply online in five minutes without harming your credit score and get funds in as quickly as 24 hours. For a limited time: Business Loans with No Repayments for the first 6 weeks. T&C apply.More details
|Lumi Lux Rate Reducing Business Loan|
Lumi Lux™ is an innovative rate-reducing business loan that rewards customers with good repayment histories and no contractual breaches throughout their loan term by dropping interest rates by 25 basis points (0.25%) every six monthsMore details
|Valiant Finance Business Loan Broker|
Valiant is Australia’s leading business loan broker with a network of over 80+ lenders. Apply for a business loan between $5,000 and $1 million and get approved in as little as 24 hours.More details
|ebroker Unsecured & Secured Business Loans|
Compare, find and match fast to over 80 bank and non-bank lenders accessing much needed working capital from a unsecured business loan.More details
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You should always consult a given offer's PDS or further documentation in the process of deciding on which loan to choose, as well as seeking independent, professional advice. If you decide to apply with one of the lenders listed above via our website, you will not be dealing with Savvy; any applications or enquiries will be conducted directly with the lender offering that product.
Invoice discounting explained
Is invoice discounting different to invoice factoring?
Yes – while both invoice bill discounting and factoring fall under the umbrella of invoice finance, there are several key differences between the two of them which are important to consider.
Nature of finance
While discounting uses invoices as collateral for a line of credit, factoring involves you selling them to your financier, after which they pay you a portion of the owed amount and the rest upon client payment (minus fees). In this way, invoice factoring isn’t really a loan, as you’re simply receiving the money owed to you early and paying a premium for a third party to help you collect it.
Invoice factoring will usually provide a larger upfront payment to the business of up to 95%, giving you more money to work with from the outset. While you’ll receive the full amount minus fees in either type of finance, this may be a more relevant consideration for you and your business if you desperately need the funds owed to you.
Level of involvement
Invoice discounting leaves the ball in your court when it comes to seeking out payment from clients, after which you submit your invoices for approval directly to your financier. However, with invoice factoring, your financier handles this process, saving you on time and stress but taking the control of debt collections out of your hands.
Because it’s a more hands-on process from start to finish, you could be charged more in fees for invoice factoring than discounting. Outsourcing the job of seeking out payment from owing customers will result in the cost of factoring increasing, with service fees (charged on each invoice), due diligence fees (covering administrative costs) and discount rate (percentage rate paid to financier) all applying. However, interest is a relevant concern for discounting, which isn’t really the case for factoring.
Invoice discounting is fully confidential, meaning your debtors won’t find out that you’re using it to boost your business’ cashflow. However, because factoring requires you to sell your invoices off to your financier and have them pursue payment with debtors directly, this type of finance isn’t confidential. This may affect existing relationships with clients, so you should be careful.
The pros and cons of invoice discounting
Boosting business cashflow
Your business can access the funds it’s owed before they’re paid, helping you avoid dips in available revenue due to a plethora of unpaid invoices.
Flexibility to draw at any time
With a line of credit, you can draw and redraw at your leisure, while you’ll only pay interest on the amount outstanding at any one time.
Keeping you in control
Your financier’s only responsibility is approving payment for invoices, leaving the debt collection process in your hands to conduct how you wish.
Cheaper than factoring
Because you’re doing the work yourself, the overall process may cost you less than opting for invoice factoring and outsourcing the debt collection work.
Less cash upfront
Although not much, invoice discounting gives you access to less money upfront, with a slightly smaller percentage of your invoice to be released from the outset.
Harder to qualify for
In general, because of the requirement for high cash turnover and robust internal accounting frameworks, it’s more difficult to access for small businesses.
The other side of maintaining control of debt collection is that it places a time requirement on your business dedicated to chasing up customers.
Potentially high interest
If you leave a significant amount withdrawn on your credit line, it’s likely to accrue considerable interest if you can’t repay it quickly.