Updated on 10th October 2023

Invoice discounting without recourse – also called non-recourse factoring – provides businesses experiencing cash flow management issues a flexible, effective financial solution. If you’re wondering what this instrument is all about and how it may be able to benefit you and your business, this article outlines everything you need to know to get started.

Invoice Discounting: Understanding the basics

Invoice discounting, simplified, is when a company receives the cash value of their unpaid and outstanding invoices in advance. As a business supplying products and/or services to customers, you may have invoices that have been issued but not yet paid due to the extended term arrangements.

To help ensure you receive the cash owed to you, a financial lender will provide you with the value of the amount owed to you – less a fee – with the invoices themselves acting as security. For businesses who engage in trade with a delay between invoice provision and payment receival, this can be especially important. One example of an industry where invoice discounting can be critical is overseas trade, such as importing and exporting, as there can be significant delays in invoices being settled. 

Using Invoice Discounting

The delay between issuing invoices and your customers settling their account can cause a strain on cash flow. The capital due to your business is locked up and this can affect both the day to day operation and the ability to take advantage of growth opportunities in the market.

Invoice discounting gives you the opportunity to free up the value of the invoices that remain unpaid. 

Paying Back the Loan

Always make sure you are aware of the contractual terms of your invoice discounting arrangement. 

In most cases, you will be required to pay back your lender over a set period of time as your repayment agreement stipulates. The majority of arrangements only set this period once the invoices you received an advance for have been settled by your customers.

Customised Packages

Invoice discounting facilities can be customised to suit the needs of a particular business. Different arrangements and varying terms and conditions will depend on both your chosen financial lender and the eligibility of your business. In most cases, around 70-90% of the value of your unpaid invoices can be provided up front by a financial institution. In some cases, this can even go as high as 95% or 100%.

Non-recourse Factoring: What you need to know

Non-recourse factoring is an additional offering that a financial lender may extend as part of the agreement.

All it means is that the lender is accepting the liability of your customers not settling the invoices. In other words, when you engage in invoice discounting with non-recourse factoring, you are protected from the risk of your customers not eventually settling the invoices you have borrowed money against. Instead, the financial institution that extended you the loan assumes that liability and the accompanying risk. 

Recourse vs Non-recourse Factoring

In a non-recourse factoring arrangement, the financial institution will essentially ‘buy’ the value of the invoices from your business. They will pay you the agreed percentage of those invoices’ value as agreed.

The outstanding invoices, from this point, are ‘owned’ by the lender and therefore the onus of ensuring payment is received is on them. When they do collect the outstanding amounts, they will reimburse your business for the remaining value of the invoices less the pre-agreed fees.

Is Invoice Discounting right for you?

Every business is different and has different financial needs. Consider what your requirements and financial situation is when weighing up the benefits and disadvantages of invoice discounting. 

The Benefits of Invoice Discounting

1. Access to capital fast

If you need access to working capital fast, invoice discounting can be an effective solution. Outstanding invoices leave a business often tight for cash flow and this financial solution can allow you to access the funds you need when you need it. Unlike traditional bank loans, invoice discounting has little to no delay.

2. Less stress in pursuing payments

Discounting with non-recourse factoring allows your business to invest its time, resources and energy into pursuing new business, day to day operations and growth opportunities. Leaving the responsibility of chasing outstanding invoices up to the financial institution lending you the money can ensure a lot less stress for small to medium sized business owners.

3. Flexible solutions

Invoice discounting is highly flexible. Some financial instruments are set and hard to tailor. But with invoice discounting, you can deploy it and the capital advanced to you in a way that will ensure the success of your business. Whether you need to recruit more staff or purchase new machinery is up to you.

4. Less risk and liability

Unpaid invoices are a liability. By unlocking the value that’s caught up in the invoices that remain unsettled, you’re reducing the amount of risk your business faces. Positive and reliable cash flow is important for all businesses and disruptions or threats that can derail a business. 

5. No legal obligation for disclosure

If you’re concerned about the level of confidentiality, don’t be. You are not legally required to disclose the use of an invoice discounting facility to customers and clients. They may realise when the financial institution’s accounts receivable and debt collections department gets in touch, but it is not your legal responsibility to disclose anything.

6. Reduce liability from bad debts

Non-recourse factoring allows you to offload the liability of bad debts in the form of customers who don’t settle their accounts. The financial lender will accept the responsibility and risk of your customers’ negligence regarding their due payments. For a business that needs ongoing and consistent cash flow this can be hugely impactful. 

The Disadvantages of Invoice Discounting

While effective, efficient and flexible, invoice discounting may not be for everyone. Here are some of the drawbacks to bear in mind when assessing the right financial solution for you.

1. Fees

There are fees associated with invoice discounting whether or not you have non-recourse factoring. 

2. Interest

There is also a percentage of interest that will be charged to you for your invoice discounting arrangement as would be incurred by any ‘loan’.

3. Restrictions on Other Facilities

When you enter into an invoice discounting arrangement, your ability to access other financial facilities may be limited. 

4. Percentage Terms

Remember to check whether the percentage of unpaid invoices’ value being offered by the lender is right for your needs and worth the fees.

5. Commercial Invoices Only

Only businesses that issue commercial invoices are eligible for invoice discounting arrangements.

6. Credit Checks

While it is certainly easier to arrange invoice discounting than conventional business loans, credit checks are often still part of the approval process.

7. Arrangement Terms

Always check what sort of provisions are included in your arrangement regarding adjusting, amending or ending a financial arrangement. 

Find the right financial solution with ScotPac

If your business is experiencing cash flow problems or just needs an injection of capital to propel your company, speak to the ScotPac team today.

As the largest non-bank lender in Australia and New Zealand, we have the experience and expertise across a wide range of business finance solutions and would love to find a tailored solution just for you. Why not arrange an obligation-free one-on-one consultation with a member of our team today?