Loan type Invoice & Trade Finance

Debtor finance, trade finance and supply chain finance: how they differ

All three fund the gap between paying for something and being paid for it. What changes is the point in the cycle the lender funds against.

Invoice or debtor finance lends against your accounts receivable. The lender advances a share of the value of eligible invoices, and the balance, less fees, is released when the customer pays. With factoring, the lender manages collections and your customers pay it directly. With invoice discounting, you keep collecting and the arrangement is usually confidential. Facilities can cover the whole ledger or just selected invoices.

Trade finance funds purchases. It pays suppliers, sometimes through a letter of credit, so stock is bought before it's sold, and it's repaid when the goods are sold or the resulting invoice is financed.

Supply chain finance is arranged around a large buyer. Its suppliers are paid early on invoices the buyer has confirmed, and the buyer pays the lender on the normal due date.

The idea is centuries older than the modern bank, and the word itself tells the story. A factor was originally a merchant's agent: someone who took goods, sold them on the merchant's behalf, and often advanced money against them before the sale. The trade has changed. The insight hasn't: a sale to a creditworthy customer is an asset, even before it's paid. In Australia, a lender's interest in receivables is recorded on the Personal Property Securities Register, the national register for security over business assets other than land.

When it helps

• Growth outrunning cash. New contracts need wages and materials long before the first invoice is paid.
• Big customers, long terms. Large customers often pay slowly. Until they do, you're financing them.
• Importing stock. Paying an overseas supplier before the goods have landed, let alone sold.
• Seasonal peaks. Building stock and staff ahead of the busy period.
• Funding without property. A facility secured by sales rather than by the family home or the business premises.

How it works

1. Tell us the scenario. Your sales, your customers and their payment terms, what you need funded and when.
2. We match it to lenders. In the first conversation we'll tell you whether it fits a lender in our group or network, and what we need to take it further.
3. The lender assesses it. They review the debtor ledger, the customers behind it and how reliably they pay, and make the credit decision.
4. Funds, then the cycle repeats. Funds are drawn as invoices are raised or goods are bought, and repaid as customers pay, on the terms agreed at the start.

What lenders look at

An invoice financier's first question isn't about you. It's about your customers.

Because repayment comes from the people who owe you money, the quality of the debtor book matters most: who the customers are, how concentrated the ledger is, how old the invoices are, and whether there's a history of disputes, credit notes or slow payment. Progress claims, invoices for work not yet completed and amounts owed by related parties are usually treated differently, or left out altogether.

For trade finance, lenders look at the supplier, the goods, the shipping and insurance, and above all the buyer at the end of the chain. Stock is only as good as the sale it leads to.

What it costs

Invoice and trade finance are priced on the work involved, not just the money. A facility that checks debtors, tracks a ledger that changes daily and sometimes manages collections carries running costs a term loan doesn't, so there's usually a service fee on top of the cost of funds. What you pay depends mostly on how much of the facility you use, how quickly your customers pay and how much risk sits with the lender. The trade-off is that you pay for funds when you use them, and the facility grows with your sales rather than your property.

Getting indicative terms costs you nothing, and any fees are agreed with you up front, before any work starts.

This page is general information only. It isn't financial, credit or legal advice and doesn't take into account your particular circumstances. Lending decisions are made by the lender.