top of page

Getting Money out of a Piggy Bank

Desperate to get the money together to buy the latest XBox game, Freda was madly shaking her Piggy Bank. Ironically, when a coin did eventually fall out, it was a twenty-cent piece. She cursed the savings system her parents had put in place and the unlockable (to her) pink, metal object in her hands. It was her money, she’d already earnt it, so why couldn’t she access it?

Giving up, her next course of action was to ask her Mum and see if she would “advance” her the money against the chores she’d completed so far this week. Surely, that was fair!

Invoice Financing

Only about half of Australian small businesses are cash flow positive in any given month. The others are “shaking their piggy banks” trying to get their hands on much-needed cash!

And tight cash flow makes it hard to pay bills, hire staff, buy inventory, or expand.

Cash-strapped businesses have trouble finding working capital, and they generally don’t want to take on more debt.

Delaying payment of most overheads is normally not an option, so high-growth SMEs with slow-paying customers face a potential risk unless they manage cash flow well.

If your self-employed clients find themselves not getting paid, their customers are treating them like a bank that offers interest-free loans!

Business owners in this situation have traditionally either taken out a loan, used a high-interest credit card, or struggled on without the cash. Many choose to go without because lending seems risky and hard to do.

Invoice finance, also known as debtor finance or cash flow finance, is often used by SMEs seeking to fund their operations, acquire equipment, or other major asset purchases.

Businesses are essentially borrowing from cash flows they expect to receive, by giving a financier the rights to an agreed portion of their receivables. This allows SMEs to obtain financing today, rather than at some time in the future.

Invoice financing can be a fast, flexible option. Invoice financing allows SMEs to get a cash advance on unpaid invoices. It could be a good alternative for your self-employed clients.

Factoring and Discounting

Factoring and discounting are both forms of invoice financing involving a provider who agrees to advance money against outstanding debtor balances.

The essential difference between factoring and discounting lies in who takes control of the sales ledger and has responsibility for collecting payment.

Invoice Factoring

Factoring (or invoice factoring) is a type of short-term business finance or cash flow finance option in which a company’s accounts receivable ledger is sold to a third party (or a factor) in exchange for instant capital. The factor then takes on responsibility for credit control and collection of the debt.

Factoring providers are traditionally whole-of-turnover, meaning the business must ‘factor’ their entire sales ledger. Therefore, the business sells its outstanding invoices to a provider, who pays the SME up to 95% upfront of what the invoices are ultimately worth. Assuming the provider receives full payment for the invoices, it will then remit the remaining balance of the invoice amounts to the SME, less interest and/or fees for the service.

As the provider collects payments directly from the customers, the customers will be aware of this arrangement, which might reflect poorly on your clients’ businesses.

Also, the provider does not take on the risk of bad debts. In other words, the provider will be able to reclaim their money from your client if the customer does not pay (recourse factoring). The alternative is to sell the debt and the risk to the provider (non-recourse factoring). This arrangement attracts higher fees, is not available with all providers, and is likely to be offered only where your client’s customer has a solid credit record.

Invoice Discounting

With invoice discounting, the business retains control of its own sales ledger and collects payment of invoices in the usual way, so customers are not aware of the arrangement between your self-employed client and the invoice finance provider.

Invoice discounting providers only advance against commercial invoices. They only work with the payments your SME client is owed from other businesses, as opposed to the general public.

With invoice discounting, the discounting company will lend your business a percentage of the money listed in the accounts receivable ledger (usually up to 85% of the ledger). In effect, it’s like having an overdraft facility that’s secured against your accounts receivables.

Invoice Factoring vs Invoice Discounting

Invoice factoring and invoice discounting are both means of gaining an advance against unpaid invoices. However, there are a couple of important differences to note when it comes to Invoice discounting vs. factoring. Whereas invoice discounting is a loan secured against your outstanding invoices, invoice factoring companies purchase the unpaid invoices outright.

The choice of factoring or discounting will largely depend on the size of the business and its sales ledger management resources.

If a business is relatively small and its human resources limited, the credit control and collection services that come with factoring are likely to be more suitable.

Invoice discounting is likely to be the preferred option for larger businesses that have the human and information resources to efficiently manage their own sales ledger and debt collection. Or the business feels strongly about dealing with its own debt collection.


Business success is often determined by the careful management of cash. Maintaining healthy cash flow is a challenge faced by growing businesses in all industries, trading with clients on credit terms. One of the key factors that determine whether a business can keep growing and fulfilling orders is ensuring that there is sufficient cash flow to maintain operations.

SMEs naturally gravitate towards traditional financial products, such as business loans and overdrafts to meet their funding needs. However, data suggests that almost half of SMEs have found barriers to finance, with traditional lenders frequently making lending decisions based on credit, of which higher-risk businesses, such as start-ups and smaller operations, have very little.

There are various reasons why cash flow financing is good for business growth, including:

  • it enables a business owner to focus on acquiring new customers, rather than chasing debtors.

  • it allows a business to extend credit lines to its loyal customers who require credit facilities.

  • it makes it possible for a business to pay its suppliers, and consequently avoid supply chain constraints. Fourthly,

  • a business owner can focus on marketing his/her business rather than fending off creditors.

These aspects can help you grow your clients' businesses, while competitors who are facing funding problems may flounder.

Essentially cash flow financing allows a business to get paid immediately for the products or services provided and invoiced. That cash can be put back into the business to purchase more inputs to sell more products or services efficiently, increasing turnover and profits.

Invoice factoring and discounting are both quite similar but have differences. Despite these differences, invoice factoring and invoice discounting are both methods to improve cash flow.

Invoice Financing is part of the Cash Flow Financing module in the Business Finance Certification, a professional development program that helps position you as an SME Finance specialist, so you can help your clients succeed and prosper.

For more information go to:


bottom of page