What is Invoice Factoring?

Invoice factoring is a way that businesses can improve their cashflow by selling some or all of their invoices to a third party (sometimes referred to as a Factor).  Invoice finance products such as invoice factoring, debtor finance or invoice discounting are all – more or less -variations on the same theme. Certainly, the tactic of using value from unpaid invoices to access capital sooner is centuries old.

At Apricity, we offer Invoice Finance – not – Invoice Factoring.  Let us tell you a bit more about how these differ.

Invoice factoring Australia

In the past, in Australia and New Zealand invoice factoring was often seen as a lender of last resort.  Businesses on the brink of insolvency sometimes turned to quick invoice factoring solutions to prop themselves up for a little longer by accessing cash from their invoices.  In many cases though, the businesses’ problems weren’t simply down to cashflow and collapsed anyway – with the knock-on effect tarnishing invoice factoring as a sensible financial solution for SMEs.

Today however, invoice finance and other invoice factoring solutions are recognised within the small business community as an essential and cost effective cash flow solution.   Growing businesses with good debtors who need to scale up or down to meet demand, or those that have faced challenges accessing traditional finance, may be ideal candidates for invoice factoring solutions.

How does invoice factoring work?

Traditionally, invoice factoring effectively means that a business sells control of their account’s receivables, either in part but more commonly in full, with the factoring company will taking on the full ledger.  The factoring company will generally take on the management of the account’s receivables of the business including chasing payments.

It works like this:

  1. Your business provides goods or services to your customers in the usual way
  2. You invoice your customers in accordance with your contract or on completion of the work
  3. You ‘sell’ the invoices to the factoring company who pays your business the bulk of the value of the invoices (typically between 80% and 90% of the value of approved invoices) straight away
  4. The factoring company now owns the invoices and your client pays them directly, any chasing of invoice payments is also taken on by them
  5. The factoring company then pays your business the outstanding amount (less their fee) when the invoice has been paid in full.

When is invoice factoring a good solution for business?

Invoice factoring may be an ideal solution for businesses providing goods or services to high credit customers and those that experience long lead times between starting the project (including upfront purchasing and hire costs) and issuing the final invoice.  Industries such as infrastructure, transport, manufacturing, wholesale, supermarkets and government are good examples where factoring can be a useful tool for smaller players.

Here’s an example:

Let’s say your business is working on a large infrastructure project. Your payment terms are 30 days, but your large labour force is paid weekly.  Your invoices regularly require chasing and are often paid closer to the 60-day mark. 

Your business is under significant pressure with cashflow squeezed to the limit as you try to meet your obligations to your employees while chasing payment yourself.  You are frustrated as delays in invoice payments mean that projected chunks of revenue are not coming in and you are constantly needing to take on more debt to stay afloat – effectively you are going backwards.

By using an invoice factoring solution your business is able to access the bulk of the capital from your invoices straight away, bringing funds back into your business and smoothing out your cashflow. You are able to pay your workforce on time, every time without taking on further debt.

What are the advantages of invoice factoring?

The primary advantage of invoice factoring is around alleviating cashflow woes – your business gets paid as soon as your invoices are issued (rather than waiting 30, 60 or even 90 days for the money to come in).

  • Better and more consistent cashflow – you are able to meet your operational costs, pay your employees, fulfil orders and grow
  • Better forecasting and predictability – improved cashflow means your business is better placed to plan for the future and take advantage of opportunities as they arise
  • Fast funding – your business can receive payment within 24 hours
  • Better business health – your business has a much stronger chance of weathering times of uncertainty and surviving for the long term
  • It’s your money – invoice factoring means you are accessing your own capital, you are not taking on a bank loan or required to put at risk any personal assets as collateral
  • Back office support – all collection and credit control are handled by a third party meaning less stress for your business.


What are the disadvantages of factoring?

As with any financial product, it is important to look at all your options and weigh up the pros and cons.

  • Contracts – the factoring company may require a long-term commitment e.g. a 24-month contract
  • Cost – invoice factoring can be expensive; your business must weigh up all invoice financing options available as well as the value you place on having funds back into your business (and back to work) sooner
  • Relationships – your customer relationships could potentially be impacted by third-party involvement, as well as there being more visibility around your cashflow position
  • Fees – there can be hidden fees or disbursements with some factoring providers
  • Concentration limits – factoring businesses can have concentration limits in place meaning that the value of your invoices could be capped depending on the factoring suppliers’ exposure in a certain industry.


Invoice Factoring vs Invoice Finance

Invoice factoring solutions and lending models such as factoring or invoice discounting mean a third party takes on the role of managing the entire accounts receivables ledger of a business, effectively taking over the ownership of the invoices and chasing payments.

Invoice finance, however, is slightly different.  Through using an invoice finance facility Apricity Invoice Finance businesses have the flexibility to choose which invoices to fund, when and what percentage.  The financier will advance a percentage of the face value of an invoice speeding up payment times but does not take ownership of the invoices.

This type of model is a great solution for businesses looking for more a more flexible finance solution at that does not lock them in, as well as being scalable as the business grows.  Invoice finance can also be a less ‘visible’ option, sitting back of house with the bulk of accounts receivables management remaining with you.

Thankfully there is a wealth of finance options available for SMEs today, with the non-bank lending landscape growing year on year as businesses look outside the constraints of traditional avenues for funding.

Cash remains key to the success of any business and a product that leverages invoices is a great way to stabilise cashflow, meet operational costs and plan for growth – all without taking on further debt.

When looking at the cost of invoice finance or factoring fees, it is important to remember that a dollar back today is worth more than the dollar you get tomorrow. By getting funds back faster, businesses can reinvest those funds at their gross profit margin. Compound this month on month and it’s easy to see that the funding cost of invoice finance can easily be offset by the value of faster payments.


Find out more about the types of Invoice Finance available