fbpx

Invoice Discounting in South Africa

How to solve cash flow gaps using unpaid invoices

TL;DR: Invoice discounting is a bridging finance facility that allows businesses to access cash tied up in unpaid invoices. Instead of waiting 30 to 90 days for customer payments, you sell your invoices to a lender for an immediate cash advance – typically up to 80% of the invoice value. This provides immediate liquidity to cover operational costs, pay suppliers, or fund growth without taking on traditional long-term debt.

What is invoice discounting?

Invoice discounting – often also referred to as invoice finance or invoice factoring – is a method of using your accounts receivable as collateral for a short-term business loan. Many small and medium enterprises (SMEs) cannot afford to offer customers 30-day or 60-day payment terms because they lack the liquidity to cover their own overheads in the meantime.

By selling these unpaid invoices to a private lender, you receive a percentage of the total value upfront. Once your customer pays the invoice in full, the lender releases the remaining balance to you, minus a small administration fee.

Who is invoice discounting for?

Invoice discounting is specifically designed for B2B (Business-to-Business) companies that sell goods or services on credit terms. It is a strategic tool for businesses that are “asset-rich” on paper – meaning they have high sales – but “cash-poor” in reality because that revenue is locked in unpaid invoices.

This facility is most suitable for:

Established Businesses

Businesses with an annual turnover typically starting from R5 million and at least 12 months of trading history.

Strong Credit Control

Since you remain responsible for chasing and collecting payments, you need a competent in-house finance team.

High-Growth Business

Need immediate working capital to fund new contracts, staff or bulk inventory without waiting for customer payments.

Suppliers To Large Entities

If your clients are government municipalities or large private corporations with long payment terms, this facility bridges that gap.

You qualify for funding if…

Goods must be fully delivered

A valid Proof of Delivery (POD) or signed job card

A formal invoice must be issued and sent to the customer

The total value must exceed R50,000 per month; this can be a single invoice or multiple smaller invoices (e.g., 4 x R12,500)

The end debtor (customer) must be creditworthy, typically requiring CGIC (Credit Guarantee Insurance Corporation) cover.

The client’s business margin should be a minimum of 15%

While some lenders require two years of audits, certain facilities allow approval with no balance sheet required.

Apply Now

How does invoice discounting work?

Applying for invoice discounting takes approximately two weeks, as the lender must assess your business history, your debtors’ creditworthiness, and the overall risk of the facility.

  • Contract Agreement: You enter a contract with a private lender to factor specific future sales.

  • Order Fulfillment: You receive an order from a customer and deliver the product or service.

  • Invoice Issuance: You raise an invoice and send it to your customer. Simultaneously, you send a copy to the lender along with the original Purchase Order (PO).

  • Cash Advance: The lender advances an agreed percentage – usually around 80% – of the invoice amount directly to your business bank account.

  • Debt Collection: The lender’s professional credit controllers manage your debtors, chasing payments on your behalf so you can focus on operations.

  • Final Settlement: Once the customer pays the full amount, the lender releases the remaining 20% to you, less the agreed-upon administration fees.

A Real-World Example

If your business completes a project and issues an invoice for R10,000:

  • Under an 80% advance agreement, the lender pays you R8,000 immediately.

  • When your client pays the full R10,000, the lender pays you the remaining R2,000, minus their service fee.

Why should my business consider invoice discounting?

Cash flow is the heartbeat of any operation. Having high “paper profits” means nothing if you don’t have the liquid cash to pay your staff or your own suppliers. Invoice discounting offers several strategic advantages:

  • Improved Liquidity: Access capital that would otherwise be locked in your debtor book for months.
  • Supplier Discounts: With cash on hand, you can negotiate early payment discounts with your own suppliers.
  • Buying Power: Use your advances to purchase inventory in bulk, improving your overall profit margins.
  • Credit Rating Protection: By ensuring you can meet your own financial obligations on time, you maintain a healthier credit rating.
  • Managed Debt Collection: Outsourcing the “chasing” of payments saves you time and reduces the stress of dealing with late-paying customers.
  • Emergency Reserves: Accessing these funds creates a “rainy day” reserve for unforeseen business emergencies

What are the risks of invoice discounting?

While the lender buys your debt and handles collection, the ultimate responsibility for the debt often remains with you. If your customer fails to pay or pays late, you may still be responsible for the debt to the lender. We have the capacity to take legal action against non-payment if necessary.

FAQs

What is the invoice discounting minimum loan amount?

While requirements can vary between lenders, a standard minimum monthly volume for a facility is R50,000. This can be comprised of one or multiple invoices.

How long does the approval process take?

The setup process typically takes a minimum of two weeks, as the lender must assess the business, the debtors, and the associated risks.

What are the disadvantages of invoice discounting?

While highly effective for cash flow, there are several factors to consider:

  • Cost: It can be more expensive than traditional bank loans or overdrafts due to daily discount fees and service charges.

  • Liability (Recourse): Most agreements are “with recourse,” meaning if your customer fails to pay, your business is still liable to repay the lender the advanced amount.

  • Administrative Burden: You must maintain a robust internal credit control process as the lender does not assist with chasing late payments.

  • Asset Encumbrance: The lender takes a legal charge over your sales ledger, which may make it harder to secure other types of funding.

What happens if the customer does not pay?

If your customer fails to pay or pays late, you remain responsible for the debt to the lender.

What is the purpose of invoice discounting?

The primary purpose is to unlock working capital by using unpaid invoices as collateral for a cash advance. It eliminates the “cash flow gap” caused by long payment cycles, allowing you to pay your own operational costs, such as salaries and suppliers, immediately after raising an invoice.

What types of businesses use invoice discounting?

It is widely used across industries with lengthy B2B payment schedules, including:

  • Manufacturing & Wholesale: To purchase raw materials for the next order.

  • Construction: To cover labor and material costs during long project phases.

  • Logistics & Transport: To manage fuel and maintenance overheads.

  • Professional Services & Recruitment: To meet weekly or monthly payroll while waiting for client settlements.

Which party typically pays the invoice in invoice discounting?

The end customer (your debtor) pays the invoice. However, unlike factoring where they pay the lender directly, in invoice discounting, the customer usually pays into a specific bank account that is monitored by the lender but remains in your business’s name to maintain confidentiality. Once paid, the lender takes their advance back and releases the remaining balance to you.

How do I apply for invoice discounting?

Audit Your Debtors

Identify your outstanding invoices and their total book value.

Prep Documents

Gather your last two years of audited financials and your latest management accounts.

Apply Online

Apply online in under 2 minutes using the form below.

THE BELOW FORM ONLY APPLIES TO INVOICE DISCOUNTING. PLEASE ONLY SUBMIT THE FORM ONCE AND CHECK YOUR INBOX FOR A CONFIRMATION EMAIL.

Loan Costs & Conditions

Fees for invoice discounting are calculated based on risk and the time it takes for your debtor to pay. Typically, daily fees range from 0.1% to 0.3% of the amount borrowed.

Loan Term: From 3 months to 60 months
Minimum Loan: R 10 000
Maximum Loan: R 5 000 000
Interest: From 0.1% per day
Minimum APR: 15%
Maximum APR: 30%

Advance Percentage: Up to 90% of invoice value

Factors Affecting Your Rate

The final cost of your facility depends on several variables:

  1. The Amount Borrowed: Larger facilities may qualify for lower daily rates.

  2. The Borrowing Period: The number of days until the debtor settles the invoice.

  3. Debtor Risk: The likelihood that the customer will pay on time.

  4. Lender Specifics: Different lenders have varying administration and service fees

 

Invoice Discounting Cost Example

Consider a business that supplies a large corporate entity on 60-day terms. The business needs cash to cover operational overheads while waiting for payment.

  • Invoice Value: R250,000.

  • Advance Rate: 80% (The business receives R200,000 immediately).

  • Daily Fee: 0.12% (Calculated based on the R200,000 borrowed).

  • Time to Payment: 45 days (The duration from the advance until the customer pays).

The Calculation:

  1. Daily Cost: R200,000 x 0.12% = R240 per day.

  2. Total Facility Cost: R240 x 45 days = R10,800.

  3. Final Settlement: When the customer pays the R250,000, the lender releases the remaining R50,000.

  4. Final Payment to Business: R50,000 – R10,800 = R39,200.

In this scenario, the total cost of finance was 5.4% of the loan amount, providing the necessary liquidity to maintain operations without waiting for the full 60-day cycle.