Written byBlock discounting is receivables finance where a lender finances a whole portfolio, or block, of hire-purchase or instalment contracts in one facility rather than individual invoices.
Key points
- The block is a set of similar contracts, such as a car dealer's hire-purchase book or an equipment hirer's rental ledger.
- The lender advances a percentage of the book's value (the advance rate), set by credit quality, seasoning, arrears and concentration.
- You usually keep servicing the contracts, so customers keep paying you and the relationship is not interrupted.
- Security is an assignment of the contracts or a charge over the ledger, registered on the PPSR; the choice affects collections and customer notices.
- It sits between asset-based finance and full securitisation: simpler and faster than a rated securitisation, more involved than invoice finance.
How block discounting works
You and the lender agree which contracts make up the block, and the lender samples and audits them. It then takes security, either an assignment of the specific contracts or a charge over the receivables ledger, and registers that interest on the Personal Property Securities Register. The lender applies an advance rate to the value of the block and charges a discount margin on the drawn balance, plus arrangement, monitoring and sometimes servicing fees.
You keep originating contracts and normally keep collecting the instalments, but you report regularly on ageing, delinquencies and roll rates, and the lender usually has audit rights. Customer payments may flow into a blocked account or straight to the lender. Periodic reconciliations true up the position for defaults, chargebacks and repossessions; in a recourse deal those losses reduce what you can draw next. Setting up is operationally heavy, but once running the facility gives predictable liquidity.
Who uses block discounting
Block discounting suits businesses that generate standardised instalment contracts or repeat rental flows: motor dealers and dealer groups with a hire-purchase book, equipment rental and hire companies, the consumer finance arms of retailers, agricultural equipment dealers with seasonal flows, and specialty lenders preparing a portfolio for warehouse funding.
Three things make it work: homogeneous contracts with similar terms and default risk, enough scale to absorb the legal and operational setup costs, and a wish to keep servicing customers while releasing cash. Smaller or mixed books tend to be a better fit for factoring, a working capital loan or a pooled warehouse facility arranged through a broker.
Key terms, costs and legal points
Recourse leaves you liable for losses beyond what the lender recovers; non-recourse transfers that credit risk to the lender, at a higher price and with tighter eligibility. Concentration limits cap exposure to any single customer, dealer or industry within the block, and covenants set minimum portfolio performance and arrears thresholds. Expect a discount margin over a benchmark, a one-off arrangement fee, ongoing monitoring fees, and break fees if you refinance early. Lenders may also hold back a small retention from the advance.
On the legal side, an assignment may require notice to customers, depending on the contract wording. Assigning a contract does not remove your GST liability on it, hire-purchase contracts are often subject to consumer credit regulation, and stamp duty can apply depending on the instrument and the state. Whether the receivables come off your balance sheet depends on whether the risks and rewards have transferred, so involve your auditor.
Example
A medium-sized motor dealer group has an $8 million hire-purchase book and needs $5 million of working capital for seasonal stock purchases. The lender agrees a 70% advance rate, giving a $5.6 million facility, and the group draws $5 million. It pays a one-off arrangement fee and an annual monitoring fee, keeps servicing its customers, and reports arrears each month against covenant thresholds, while the lender holds a 5% reserve for short-term anomalies. The group buys its seasonal stock without touching its overdraft, and as customers pay their instalments the facility is reconciled and the drawn balance comes down.
Not to be confused with
- Invoice discounting
- invoice discounting funds individual trade invoices as they are raised, whereas block discounting funds a whole book of instalment contracts in one facility
- Securitisation
- securitisation packages a large portfolio into securities sold to capital markets, which is slower and bigger in scale than a block discounting facility from one lender
- Stocking finance
- floorplan or stocking finance funds a dealer's unsold stock, whereas block discounting funds the contracts customers have already signed
Frequently asked questions
Is block discounting recourse or non-recourse?
It can be either. In a recourse facility you stay liable for defaults beyond what the lender recovers, and losses usually reduce your future advances, which keeps the price lower. A non-recourse facility transfers more of the credit risk to the lender, so it costs more and comes with tighter eligibility and covenants.
Will my customers know their contract has been assigned?
It depends on the legal structure. An assignment of specific contracts often requires notice to the customer, while a charge over the receivables ledger may not. In most facilities you keep servicing the contracts, so customers keep paying you as normal. Check the notification clauses in your contracts before agreeing the structure.
How long does it take to set up a block discounting facility?
Expect several weeks to a few months. The lender has to review sample contracts, audit your origination and servicing processes, run portfolio analytics on concentration and arrears, search the PPSR for prior charges and document the security. Having contract-level schedules, historical performance data and financial statements ready shortens the timeline.
How are collections handled under block discounting?
Collections can stay with you under strict reporting, or the lender can take over receipts into a blocked account or appoint a servicer. The facility agreement spells out where customer payments go. Most originators prefer to keep servicing because it preserves the customer relationship, and lenders usually accept that if the reporting is sound.
Does block discounting take the receivables off my balance sheet?
Not automatically. Whether the contracts are derecognised depends on whether the risks and rewards of ownership have transferred to the lender, which turns on the recourse terms and the legal structure. A recourse facility usually leaves the book on your balance sheet. Talk to your auditor before assuming any accounting outcome.
Related terms
Invoice discounting
Invoice discounting is a working capital facility where a lender advances most of an unpaid invoice's value and holds a reserve until your customer pays.
Read definitionHire purchase
Hire purchase is a finance agreement where a financier buys an asset and hires it to you for fixed instalments, with ownership passing to you at the final payment.
Read definitionFactoring
Factoring is a finance arrangement where a business sells or assigns its unpaid invoices to a specialist lender, the factor, for an immediate cash advance and outsourced collections.
Read definitionAsset-based finance (ABF)
Asset-based finance (ABF) is business finance secured on a company's assets, with the facility size set by the value of the receivables, inventory, equipment or property pledged.
Read definitionSecuritisation
Securitisation is the process of pooling loans, leases or receivables into a separate vehicle that issues securities to investors, so the originator raises funding and transfers risk.
Read definitionStocking finance
Stocking finance is a short-term facility that funds a dealer's inventory unit by unit: the lender pays the supplier and the dealer repays each advance when that unit sells.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.