Cashflow Finance

To qualify for cashflow finance, you must be:

• A company, partnership, or sole trader
• Based, registered, and operating in Australia
• Selling to other businesses on credit terms
• Accessing finance for business purposes.

The costs of cashflow finance are broadly equivalent to those of an unsecured bank overdraft. There are three main kinds of charges:

• Service fee: a percentage of the total amount of each invoice you are financing. This fee currently ranges from around 0.30% to 5%.
• Discount fee: the interest charged on funds advanced by the lender. The interest rate currently ranges from around 5% to 13% p.a.
• Due diligence fee: a flat fee to cover the lender’s analysis of your debtor ledger.

Some lenders charge additional fees, including:

• Establishment fees
• Annual management fees
• Bad debt insurance fees
• Early exit fees
• Minimum use/non-utilisation fees
• Audit fees.

Your service fee and discount fee will depend on your choice of lender, as well as:

• Type of finance (invoice discounting vs. factoring)
• Extent of finance (entire debtor ledger vs. individual invoices)
• Your monthly turnover and volume of invoices
• Nature and age of your business
• Creditworthiness of your customers
• Your payment terms

Invoice factoring is a form of cashflow finance which is disclosed to your customers. The financier purchases your unpaid invoices and deals with your customers directly, taking responsibility for managing your accounts receivables ledger and debt collection. Invoice factoring is most suitable for small businesses who do not have their own established credit management systems.

Invoice discounting is a form of cashflow finance which is not disclosed to your customers. It is more like a short-term loan which is secured against your accounts receivable ledger. You retain responsibility for managing your accounts receivables ledger and debt collection. Invoice discounting is most suitable for larger businesses who have well-established inhouse credit management systems.

A whole turnover arrangement requires you to finance your entire sales ledger.

In a spot discounting or factoring arrangement, you finance specific invoices rather than your entire receivables book.

The advance rate is the percentage of an invoice that the financier pays when you issue your invoices, before your customers have paid.