Eligibility for Invoice Discounting 

Understanding the Basics: Invoice discounting, a facet of debtor finance, is widely embraced by larger enterprises. Unlike factoring, this financial tool swiftly converts unpaid invoices into accessible cash, offering a practical solution for managing cash flow fluctuations, especially during seasonal shifts. 

Qualifying for Invoice Discounting: Numerous banks extend invoice discounting services, making it imperative to grasp the qualifying criteria. Importantly, invoice discounting doesn’t add to your debt; it leverages funds owed to your business. The allure lies in its potential to enhance cash flow, provide flexibility, and fortify credit management. 

Considerations for Applicants: It’s crucial to recognize that invoice discounting is a funding-only facility, making it less suitable for businesses lacking robust credit control practices. 

Determining Eligibility 

Key Requirements: To ascertain eligibility, consider the following prerequisites: 

• Minimum Annual Turnover: A projected minimum annual turnover of $500,000 is often required, although specialist lenders may accept lower amounts. 
• Diverse Debtors: A sizable number of debtors is preferred, as reliance on a single or a few debtors is deemed high risk. 
• Invoice Age: Invoices should not surpass 90 days from the end of the month of issuance. 
• Debtor Ledger Management: Demonstrable expertise in managing and maintaining your debtor ledger is essential. 
• Security Assets: Offering fixed assets as security enhances your application, particularly if you lack a history with the lender. 
• Credit History: A clean credit history is generally preferred, although exceptions may apply. 

Qualification Likelihood: Meeting the outlined requirements significantly enhances your likelihood of qualifying for invoice discounting. 

Determining Financing Limits 

Loan-to-Invoice Ratios: Banks commonly lend between 75% to 85% of outstanding invoices, with potential variations based on business strength. Diversification of risk is favored, and a robust business with low risk may secure loans up to 90%. 

Validating Income for Approval 

Documentation Requirements: Banks typically necessitate a comprehensive assessment of business income. Prove your income through projected cash flow statements, bank statements, tax returns, and, if applicable, Year To Date (YTD) income from MYOB. 

Specialist Lenders: Some specialist lenders may accept invoices as sole income evidence, but this varies among lenders. 

Security Considerations 

GSA and Alternatives: While commercial property purchases often demand a General Security Agreement (GSA), invoice discounting under $1 million can sidestep this requirement. Instead, a Guarantee and Indemnity (G&I), a less formal agreement, can be provided. 

Criteria for G&I: This agreement relies on your sound financial position, strong equity in other properties, and the loan being under $1 million, minimizing risk. 

Navigating the Invoice Financing Process 

Application and Access: The invoice discounting process is straightforward. Apply after invoicing clients, gaining access to a percentage of funds within a business day. You handle invoice collection, paying a fee to the lender upon client payment. 

Preparation is Key: Thorough preparation is vital. Address underlying business issues, and don’t use invoice discounting to mask problems; lenders can discern short-term solutions. A robust business history enhances approval chances. 

Invoice Discounting FAQs 

Difference from Factoring: Invoice discounting, tailored for larger businesses, differs from factoring used by smaller businesses. Notably, credit control responsibility lies with the lender in factoring, while invoice discounting allows businesses to manage collections. 

Unpublished Fees: Invoice discounting fees aren’t standardized, varying by application and lender. Costs often include management fees against invoice values, with rates undisclosed due to inconsistency. 

Role of Mortgage Brokers: Debtor finance, especially invoice financing, is intricate. While many banks offer it, only a few specialize. Mortgage brokers, adept at finding tailored solutions, play a pivotal role in securing favorable deals with the right lenders.