Invoice Discounting

Learn how invoice discounting works with Skippr

What is invoice discounting?

Invoice discounting is a type of short term borrowing that lets businesses access cash that’s tied up in unpaid invoices. Rather than having to wait for those invoices to be paid, invoice discounting can release those funds upfront and they can be used to fund business growth.

It is called invoice discounting as the borrower receives a discounted amount of the face value of invoices upfront. Typically, the invoice is ‘discounted’ by 20% so the borrower can access 80% of the value of the invoice, or pool of invoices, and when the invoice is paid, the extra 20% is either paid back to the business or used to pay off your loan balance.

With invoice discounting, the borrower retains control over the accounts receivable and the lender does not contact your customers. This is known as confidential invoice discounting or undisclosed invoice discounting.

Invoice discounting is typically used for borrowing against the full accounts receivable ledger but can also be used for a single invoice, single customer or more than one customer.

Repayment
When your customer pays the invoice
Charges
Interest 8-15%
Fees 0.75% - 1.5% per drawdown
Speed
Same day funding
Collateral
Invoices are the security

Pros

Don't need to wait for the invoice to be paid to receive funds
Invoices are collateral not real estate property
Based on credit of your invoiced businesses
Flexible access to funding
Your customers don't know you are using invoice finance

Cons

Costs will be higher than if real estate security is used
You keep responsibility for collecting invoices

What is the difference between Invoice Discounting and Factoring?

Invoice discounting and factoring are similar and are both forms of invoice finance. There are few differences between invoice discounting and invoice factoring though, and these are mostly around who controls the ledger and whether your customers are aware of the lender.

With invoice discounting, you keep control of your accounts receivable ledger. That means you will be solely responsible for dealing with your customers to get your invoices paid. Some borrowers prefer this as they can control their customer relationships and don’t have the risk of a third party annoying them! With invoice discounting, your customers will not know there is a lender in the background which is why it’s called confidential invoice discounting or non-disclosed invoice discounting.

Factoring is when a business sells its invoices to a third party who then manages the ledger and collects the payments. A benefit of this for businesses is that responsibility for invoice collections is passed to the third party so the business can focus on other things. Because the factorer provides these additional services, it is more expensive than invoice discounting where collecting invoices is retained by the business. Given the customers are aware that the invoices have been sold to a factoring business, this is also known as disclosed type of invoice finance.

Who qualifies for invoice discounting?

Businesses with unpaid invoices with other businesses can qualify for invoice discounting.

Customer invoices are the main security for invoice discounting finance so the amount of money you can borrow depends a lot on the amount and quality of your invoices. Other aspects of your business are also considered, such as profitability, existing debt levels and the time you have been in business.

What you need to qualify

A valid ACN
More than 12 months in business
Invoices with other strong Australian businesses
Invoices are only issued after goods or services are delivered
At least $1m in annual revenue
Minimum of 3 customers
You use Xero, MYOB AccountRight or Quickbooks

How do you apply for invoice discounting?

Applying for invoice discounting with Skippr is a quick and easy online process and starts with signing up to Skippr at skippr.com.au and connecting to Xero. This allows Skippr to securely view your accounts receivable ledger and some other relevant information. Additionally, we may require the following:

Certified Photo ID

A driver's license or a passport

Bank Statements

Access to the last 6 months

ATO Statements

ATO Integrated Client Report

Credit Scores

Credit Score Report

How does invoice discounting work?

If customers had reasonable payment terms and always paid on time, there would be less need for invoice discounting but unfortunately that’s rarely the case. This is why invoice discounting has been used by businesses for thousands of years and is becoming a much more common in Australia.

Having reliable access to cash flow is essential for any growing small business. Whether it’s for paying suppliers, your employees, investing in equipment or stock or simply having the confidence to take on that big new order, having cash available when you need can ease a lot of the stress of being a small business owner.

How invoice discounting helps cash flow

Invoice discounting lets you unlock cash from your unpaid invoices at the time of issuing your invoices. Instead of waiting for your invoices to be paid, you can smooth business cash flow and bringing forward those amounts you are due and they used for business operations or to invest in growing your business today.

How does invoice discounting with Skippr work?

By connecting the Skippr platform to Xero, your accounts receivable ledger is updated in the platform as invoices are raised and paid. Your available funds are up to 80% of eligible invoices which are customer invoices that are in Australian dollars, 90 days or less past the issue date and with customers of good credit quality.

The Skippr platform lets you draw funds with a click of a button and you will receive funds in your account the same day. The platform also has a simple and easy-to-use receivables management tools to help you get your invoices paid sooner so you aren’t paying more interest than you need to be.

Your customer invoices will be paid into a new collections account set up by Skippr and payments will be used to pay off your loan and any excess will go to the operating account of your business. Bank feeds from this collections account will be connected to your Xero and Skippr will post transactions relating to drawdowns and repayments back to your Xero so you can reconcile bank transactions with one click.

Find out more about how invoice discounting with Skippr can solve your cash flow problems and book a meeting with us today.

What will invoice discounting cost you?

If you are prepared to offer your home as security for a business loan you will almost always get the lowest cost of funding for your business. The other extreme is unsecured business loans where no security is taken and lenders have to charge more for the additional risk.

In between real estate secured loans and unsecured business loans sits Asset Based Finance. This is where a borrower uses an asset on the balance sheet of the business as security for a loan. Common examples of asset backed finance are vehicle finance and equipment finance. Invoice discounting is another example of asset based finance. By using your accounts receivable ledger as collateral, you can lower your cost of funding without having to mortgage your home.

When is invoice discounting worth the cost?

Invoice discounting is often more expensive than a loan secured by real estate but many business owners probably don’t want to mortgage their house for the business. Invoice discounting is also more flexible and less expensive than unsecured business loans as business owners can draw funds against invoices only when you need a cash flow boost and you will not be paying interest on funds you don’t need. Invoice discounting finance is also repaid when your invoices are paid and not regular repayment periods which a lot of borrowers like.

The funding flexibility of invoice discounting can provide peace of mind for business owners knowing that cash can be unlocked from the ledger when required. It can also give business owners the confidence to invest in their business and take on new orders knowing that funding them won’t be an issue.