Key takeaways

• They sit on opposite sides of the shipment: Trade finance pays before goods change hands. Invoice factoring releases cash after you have delivered and invoiced.
• Importers usually need the first: If your supplier wants payment before a container ships, there is no invoice to factor yet.
• Exporters usually need the second: If you ship on open account and wait 60 or 90 days, the receivable is the asset to fund.
• Overseas debtors complicate factoring: Many domestic facilities exclude foreign debtors or price them higher unless trade credit insurance is in place.
• The decision: Ask whether the goods have left your hands. That single question routes you to the right product more reliably than any comparison of rates.

Search for help funding an import or export cycle and you will land on invoice factoring, because it is the most heavily marketed product in Australian business lending. For a lot of import and export businesses it is the wrong answer, or at least the wrong answer first. The two products are not competitors so much as consecutive stages, and knowing which stage you are standing in saves both money and a wasted application.

Who this actually affects

Cross-border trade in Australia is dominated by smaller operators carrying long cash cycles. The Australian Bureau of Statistics recorded 56,274 merchandise exporters, 62% of them small businesses, with wholesale trade the largest single industry among them. On the import side, the ABS counted 124,507 business importers, two thirds of which were small businesses.

Those businesses face the same structural problem from opposite directions. An importer pays first and sells later. An exporter ships first and is paid later. Both are funding a gap, but the gap opens at a different point, and the security available to a lender is completely different at each point.

Trade finance: funding before the goods arrive

Trade finance covers the stretch between committing to a supplier and having goods you can sell. The lender typically pays your overseas supplier directly against a confirmed order, then the facility runs across production and shipping, commonly 90 to 180 days depending on the lane. Repayment comes from the sale, or from rolling the resulting receivable onto another facility.

Because there is no invoice yet, the lender assesses the order, your supplier's track record and the credit quality of your end customer. Security is generally the goods themselves rather than property, which is what makes it workable for businesses that lease their premises.

Invoice factoring: funding after you have delivered

Factoring applies once you have shipped and invoiced. The funder advances a large share of the invoice value, commonly up to 90%, usually within 24 hours, and is repaid when the customer pays. Invoice finance facilities can be disclosed or confidential, and they grow automatically as your invoicing grows, which suits a business scaling its order book.

The complication for exporters is the debtor. A funder assessing an Australian debtor can check credit history and enforce locally. An overseas debtor is harder on both counts, so many domestic facilities either exclude foreign receivables, restrict them to approved countries, or require trade credit insurance before they will advance. Ask about that early, because it is the point where an export application most often stalls.

Most trading businesses need both, in sequence

Treating these as alternatives is the mistake. A business that imports and then sells to Australian retailers has two distinct gaps: paying the supplier, then waiting on the retailer. Funding the first with trade finance and the second with factoring means each stage is priced against the security that actually exists at that moment. Running both through one general facility means paying the more expensive rate across the entire cycle. A working capital facility then sits underneath for the wages and overheads that continue regardless.

A realistic scenario

A Perth food equipment importer buys from two European manufacturers and sells to hospitality venues across Australia, with a growing line of exports to New Zealand. It applies for factoring after seeing it advertised, and is declined the funding it actually needs, because at the point of pressure it has no invoices to factor. The cash is required to pay a manufacturer before a container is loaded.

The structure that fits uses trade finance to pay the European suppliers against confirmed orders, with the facility running through shipping and customs. Once the equipment is delivered and invoiced to Australian venues, factoring releases cash against those invoices and clears the trade line early. The New Zealand receivables are handled separately, with the funder approving that debtor country and pricing accordingly. Same business, two products, each doing the job it was designed for.

Frequently asked questions

Can I factor an invoice to an overseas customer?

Often yes, but on different terms. Funders assess overseas debtors more cautiously and may limit which countries they accept, apply lower advance rates, or require trade credit insurance. Raise it at the outset rather than after a facility is established around domestic debtors only.

Which is cheaper?

Factoring is usually cheaper per dollar, because a verified invoice is stronger security than an unfulfilled order. That does not make it the answer when your gap sits before shipment. Paying slightly more for the right stage costs less than funding the whole cycle on one facility.

Do I need property security for either?

Generally not. Trade finance is secured against the goods and factoring against the receivable, so both are accessible to businesses that lease. Directors' guarantees are common on both, so read what you are signing.

What matters most

Before comparing rates, work out where in the shipment your money is trapped. If it is trapped before the goods leave your supplier, no amount of factoring will help, because the invoice does not exist yet. If it is trapped in a delivered order awaiting payment, factoring is the direct and cheaper answer. Most import and export businesses eventually need both running together, with the handover point set so that neither facility carries the cycle longer than it should. Get that sequencing right and the trade cycle stops dictating how many orders you can accept.

This article is general information only and does not take your circumstances into account. Speak with your accountant or a licensed adviser before making a finance decision.

Funding an import or export cycle and unsure which stage to finance? Compare trade and stock finance across 50 or more lenders here.