Specialist finance

What is invoice trading?

Invoice trading is the buying and selling of invoices. It's a way of financing your business without debt or getting a loan by selling outstanding invoices to another company in exchange for money you can use as working capital. With invoice trading, you retain ownership of the invoice and continue to collect payment from your customer. 

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What exactly is invoice trading, and how does it work in Australia?

Invoice trading is a form of financing. The idea is to sell some of your outstanding invoice amounts to another business in exchange for cash or another form of credit. This can be a great option if you have an invoice due but can't pay it immediately. For example, if you have a construction business and your clients take months to fulfil payment, you may want to trade these invoices for immediate cash through an online invoice trading platform.

This usually happens through a centralised platform. Multiple invoice trading companies also act as intermediaries between buyers and sellers and take a cut of each transaction in return for their services. They take on some of the risk associated with the transaction so both parties can benefit from lower costs and greater security than if they were working directly with each other.

Different types of invoice trading 

Invoice trading is a way for a supplier to sell their invoices to another party. This other party will then pay the invoice price while the supplier receives an early cash payment. For example, Energy Australia might sell an overdue invoice to a debt collection agency, which pays a discounted price for the invoice and assumes responsibility for chasing up that debt.

In essence, invoice trading allows you to sell your debts and receive immediate payment in return. The person who buys your invoices could be another company or an individual collecting debts on behalf of their own business or private interests. Groups of investors often deal in invoice trading to diversify their portfolios.

Before entering into an agreement with anyone about how much they will pay for your invoices, make sure you know exactly what kind of information is contained within each one so that there are no surprises later when it comes time for payment (or lack thereof).

Downsides of trading invoices

While invoice trading can help free up cash, it can damage your relationship with clients if there's any disruption on their end. While some invoice trading companies are discreet and deal directly with you, others may assume responsibility for chasing up the debt directly with your clients. Make sure you understand the terms of each invoice trading platform to know precisely how it might affect your customers.

In recent years, invoice trading has been usurped by invoice financing — partnering with a single company that lends you the cash tied up in your unpaid invoices and gets paid when you do—no hassle, completely secure, with minimal fees. Your clients stay unaffected, and you can significantly reduce your time spent doing accounting admin.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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