Comparing factoring and invoice discounting rates in SA

Comparing factoring and invoice discounting rates in South Africa

Did you know that you can convert your debtors’ book into cash? Many companies in South Africa and abroad use this approach – broadly called invoice finance – to keep their cash flows healthy. This allows these organizations to operate optimally, maintain valuable customer relationships and fund growth.

You may have heard of invoice discounting and wondered about invoice discounting rates in South Africa. But before going into detail on these issues, it’s important to understand how this type of financial service works.

What is invoice discounting?

Customers often ask for credit sales terms of 30 days or more. This leaves the businesses that supply these customers short of cash as they wait for their invoices to be paid. Invoice finance releases the working capital tied up in these customer invoices earlier than the agreed payment date. This is good news for SMEs and other firms that simply can’t wait 30, 60, 90 or even 120 days for the cash that’s owing to them.

There are two types of financial services that provide cash advances against outstanding debtor balances: invoice discounting and factoring. The main difference between these two funding strategies is the party responsible for managing the debtors’ book. This role includes liaising with customers on all issues relating to credit control and invoice payment.

So, how do you decide which route is best for your business? It may come down to cost. Or, if you’re thinking more strategically: value.

Invoice discounting rates in South Africa

Before weighing up the various factoring and invoice discounting rates in South Africa, it’s important to understand the difference between these two working capital solutions.

Both provide much-needed cash flow injections against the funds that are owing on your invoices. But, with invoice discounting, you stay in control of your own debtors’ ledger. This means that your financial services provider does not provide any extra services beyond the funding agreement.

With factoring, on the other hand, your financial services provider acts as an extension of your debtor administration and credit control department. You get access to expert services in these areas as part of your factoring facility.

This means that when comparing factoring and invoice discounting rates in South Africa, it’s essential to also account for the many, many hours you’ll save in the back office when you go the factoring route.

The cost of factoring

Merchant Factors is a flexible and innovative factoring company that has been helping local businesses to reach their goals for 30 years.

When you enter into a contract with Merchant Factors to factor your credit sales, it works as follows:

  • Merchant Factors pays up to 75% of the invoice
  • Merchant Factors asks your customer to settle
  • You wait for payment
  • Your customer settles
  • Merchant Factors gives you the balance of 25% of the invoice, less an agreed admin fee

Added advantage

When you’re exploring the cost of factoring with Merchant Factors, it’s important to consider the added value that this expert partner offers your business.

With Merchant Factors, you have more than a financial services provider. You have a professional team of credit controllers whose skills and knowledge will benefit the smooth operation of your business.

Merchant Factors will:

  • Assess your clients' creditworthiness
  • Attend to credit control and debtor administration
  • Take care of collections
  • Keep you well-informed of transactions 24/7
  • If needed – institute legal action

Why factor?

Factoring unlocks many benefits beyond improving your cash flow. If you make factoring a part of your business model, you will have the working capital and time you need to focus on:

  • Growing your business
  • Generating profits
  • Negotiating discounts from suppliers that you are now able to pay early

Is factoring right for your business?

Companies that qualify for factoring facilities with Merchant Factors would typically have an annual turnover from as little as R1 million to as much as R150 million.

Here are some questions to consider:

  1. Do you sell on credit terms not exceeding 120 days?
  2. Do you deal business-to-business only?
  3. Do you sell on an outright basis, not on consignment or "sale or return"?
  4. Do you want to grow your business without compromising equity or control?
  5. Do you want a finance solution that grows with your turnover?
If you answered “yes” to all five questions, contact Merchant Factors today.

Finance beyond the Numbers.