What is invoice discounting?

You and the lender first agree the facility: advance rate, fees, reserve percentage, reporting frequency, minimum term and covenants. The lender runs credit checks on your debtors and usually registers its security interest on the PPSR. From then on you invoice customers as normal and upload or assign each invoice through a portal or accounting software such as Xero or MYOB.

The lender pays the agreed advance into your account and holds the rest as a reserve against fees, chargebacks and disputes. Your customer pays on their normal terms: into your account in a confidential facility, or into a trust or lockbox account the financier controls in a disclosed one. The lender then reconciles the payment, deducts its fees and releases the reserve balance to you.

Confidential (undisclosed) invoice discounting means customers are unaware of the financier and keep paying you, so you protect the relationship and keep running your own credit control. Disclosed invoice discounting means customers are told and often pay into a lender-controlled account, which can reduce debtor fraud and speed up reconciliation.

Recourse is the standard model: if a debtor does not pay, you stay liable and must repay the advance. Non-recourse shifts the credit risk on specified debtors to the financier, costs more and is usually limited to debtors with strong credit ratings. Hybrid facilities mix these features, for example confidential with selective disclosure for high-value accounts.

Pricing has several parts: the advance rate; a discount or finance fee charged on the advanced amount; an ongoing facility fee; per-invoice transaction or service fees; the reserve held back until payment; PPSR and legal setup costs; and late payment or recovery fees if invoices stay unpaid. Compare the effective cost once fees and reserves are included, not just the headline discount.

Contract terms to check include the minimum term and notice period, debtor concentration limits that cap any single customer as a share of the facility, reporting and integration requirements, security such as personal guarantees, and the exact wording of the recourse clause. Many facilities are documented as a purchase or assignment of the receivables rather than a charge, which changes who owns the debt, how it sits on your balance sheet and what happens on termination, so have a lawyer check which structure you are signing.

Discounting does not change how you recognise income. You record the sale and the GST when you issue the invoice under your usual accounting method, and the GST is reported on the BAS for the period the invoice is issued unless you account for GST on a cash basis. You receive cash earlier, and whether the receivable stays in your ledger depends on the structure: a charge or an assignment by way of security leaves it on your balance sheet until the customer pays, while a true sale of the debt can take it off. The test is whether the risks and rewards of ownership have transferred.

Discount and facility fees are generally deductible business expenses. Registering the financier's security on the PPSR can affect other lenders' priority, so discuss it with any bank that already holds security over your business. Confirm the treatment with your accountant and the ATO's guidance.