Invoice discounting in South Africa

The problem it solves

A profitable business can run out of cash. It happens like this: you deliver, you invoice, and your customer pays in sixty or ninety days — while your suppliers, your salaries and SARS do not wait. The gap between doing the work and being paid for it has to be funded by somebody, and if it is not a funder it is you.

Growth makes this worse rather than better. Double your revenue and you double the amount tied up in debtors, so the fastest-growing businesses are frequently the ones closest to the edge. This is the single most common way a genuinely good South African business gets into trouble, and it is almost entirely a structural problem rather than a trading one.

Invoice discounting closes that gap directly. Instead of borrowing against the business as a whole, you borrow against money that is already owed to you by customers who have already accepted the work.

How the facility actually works

You invoice your customer as normal. You submit the invoice to the funder, who advances a percentage of its value — typically 70% to 85%, sometimes higher for strong debtor books. Your customer pays you on their usual terms, into a designated account. The funder takes the advance plus their charges, and the balance comes to you.

Critically, the arrangement is usually confidential. Your customer continues dealing with you, pays you, and need never know a funder is involved. For businesses worried that a funding arrangement signals distress to a major account, that matters a great deal.

Most facilities are revolving rather than one-off. You have a limit, you draw against invoices as you raise them, and as customers pay the limit frees up again. It behaves less like a loan and more like an overdraft that grows with your sales.

Invoice discounting or factoring?

These are used interchangeably in conversation and they are not the same thing.

Invoice discounting advances against your invoices while you keep the credit control function. You chase your own debtors. The arrangement is normally confidential.

Factoring sells the invoices to the funder, who then collects from your customers directly. It is usually cheaper, because the funder controls collection and can act faster on a slow payer. It is also visible — your customers know.

Which is right depends on two things: whether your own credit control is any good, and how your customers will read it. A business with a disciplined collections process and sensitive client relationships wants discounting. A business whose debtor days are drifting because nobody chases may genuinely be better off factoring, because the funder's collections discipline is part of what you are buying. Our Academy lesson on trade finance instruments sets both out alongside the other transaction-based facilities.

Recourse and non-recourse — the term that matters most

This single term changes the risk profile of the whole facility, and it is frequently glossed over.

Under a recourse facility, if your customer never pays, you repay the funder. You carry the credit risk. This is the cheaper and far more common arrangement in South Africa.

Under non-recourse, the funder carries the loss if the customer defaults, usually subject to conditions and often backed by credit insurance. It costs more, sometimes considerably, and the protection is narrower than it first appears — non-payment because of a genuine dispute over the work is typically excluded, and disputes are how most non-payment actually arises.

Read that exclusion carefully before paying a premium for cover you may not be able to claim on.

What it costs

Pricing has two components and quoting only one of them is how facilities look cheaper than they are.

A discount charge, effectively interest, accrues on the advanced amount for as long as it is outstanding — usually quoted as a margin over prime. And a service fee, a percentage of turnover put through the facility, covering administration and credit control.

Because the discount charge runs on time outstanding, the true cost depends heavily on how fast your customers actually pay. The same facility is materially cheaper against a debtor book that settles in forty-five days than one that drifts to ninety. Ask for the all-in cost modelled on your actual debtor days rather than your terms — the difference is often larger than the margin you would have negotiated.

It is more expensive than a bank overdraft. It is also available to businesses a bank will not extend an overdraft to, because the funder is underwriting your customers' ability to pay rather than your balance sheet. The relevant comparison is usually not a cheaper facility you cannot get, but the cost of the growth you are turning down.

Who qualifies

The assessment centres on your debtor book rather than on you, which is what makes this accessible to businesses that fail a conventional credit test.

Funders look for invoices raised against other businesses — business-to-consumer invoicing generally does not qualify. They look for creditworthy customers, because that is the actual risk being taken, and a concentrated book where one debtor is most of your revenue will attract limits or a lower advance rate. They look for clean invoicing: work delivered, accepted, and not subject to dispute or stage payments.

And they look at your own administration. A debtors ledger that reconciles, aged analysis that is accurate, and credit notes that are properly recorded. Businesses are declined for messy ledgers more often than for weak customers, and that is the cheapest thing on this list to fix.

When it is the wrong instrument

Invoice discounting funds a timing gap. It does not fund a loss, and using it to do so simply moves the problem forward while adding cost. A business whose real issue is margin, not timing, will find the facility accelerates the arrival of the reckoning.

It also does not fit where the money is needed before delivery — to buy stock or materials to fulfil an order you have not yet completed. That is purchase order funding, which underwrites the order rather than the invoice, and the two are frequently chained: PO funding to deliver, invoice discounting to bridge the payment.

Where the need is import or export related, a letter of credit or a broader trade finance facility is usually the better structure. And where the requirement is genuine expansion rather than working capital, business lending or growth capital are the honest answers.

Where Caban fits

We are not a lender. We structure the facility and take it to the funders most likely to price it well for your particular debtor book — which varies more than businesses expect, because different funders have appetites for different sectors, customer types and concentrations.

Most usefully, we look at whether invoice discounting is actually the right instrument before arranging it. A significant proportion of the businesses that approach us about working capital need something else: a different facility, a change in payment terms, or in some cases a conversation about pricing rather than funding at all. Every enquiry is reviewed by a principal.