Quick answer
Invoice finance lets a business borrow against unpaid customer invoices. A provider advances a percentage of each invoice's value, then pays the remainder, less fees, when the customer pays. Factoring usually means the provider collects from your customers; invoice discounting usually leaves collection with you and can be confidential. It suits businesses that sell to other businesses on payment terms.
Key points
- Funding grows with your sales because it is tied to invoices.
- Factoring involves the provider collecting; discounting usually does not.
- Fees combine a service charge and a discount charge on money advanced.
- Recourse terms decide who wears the loss if a customer never pays.
At a glance
- Security
- Your receivables (unpaid invoices), often with a general security agreement
- Typical users
- Businesses invoicing other businesses on 30 to 90-day terms
- Cash released
- A percentage of each invoice upfront, the balance on payment
- Main costs
- Service fees, discount charges, setup and minimum fees
Our review: invoice finance at a glance
What works well
- Turns slow-paying invoices into cash quickly
- Limit can grow as sales grow
- Less reliance on property or other security
- Factoring can take collection work off your hands
What to watch
- Fees can be complex and hard to compare
- Customers may know you are using finance
- Minimum terms and fees can lock you in
- Not suitable for cash or consumer sales
Usually suits
- Wholesalers, manufacturers, labour hire and transport businesses
- Growing businesses whose receivables outpace their cash
- Firms with creditworthy business customers
Probably look elsewhere if
- Most of your sales are cash, card or to consumers
- Customers frequently dispute invoices
- You only need occasional, small amounts
If your customers are other businesses, there is a good chance a large part of your money is sitting in their bank accounts at any moment, waiting for 30, 60 or 90-day terms to run out. Invoice finance unlocks that money early. Rather than lending against your property or your trading history, the provider lends against the invoices themselves. It is a clever structure with real advantages, and a fee model that rewards careful reading.
How invoice finance works
- You issue an invoice to a customer as normal.
- The invoice is submitted to the finance provider, either individually or as part of your whole ledger.
- An agreed share of the invoice is paid to you, typically within one or two business days.
- When the customer settles, the money goes to you or straight to the funder, according to the facility type.
- The provider deducts the advance and its fees and passes the balance to you.
The facility limit is usually linked to the value of approved receivables, so as sales grow, available funding grows with them. That makes invoice finance one of the few products that naturally scales with a growing business.
Factoring versus discounting
| Factoring | Invoice discounting | |
|---|---|---|
| Who collects from customers | Usually the provider | Usually you |
| Do customers know | Usually yes | Often confidential |
| Typical business | Smaller or growing businesses | Larger, well-organised businesses |
| Admin burden on you | Lower | Higher |
There are also selective or single-invoice facilities, which let you choose which invoices to fund. They tend to cost more per invoice but avoid committing your whole ledger. The glossary entries for invoice factoring and invoice discounting cover the terms in more detail.
What it really costs
Invoice finance fees usually come in layers: a service or administration fee, a discount charge on the money advanced for as long as it is outstanding, and sometimes setup fees, minimum monthly fees and charges for extra services such as credit checks on new customers. Because of those layers, the cost per invoice depends heavily on how quickly your customers pay. An invoice paid in 20 days may be cheap to finance; the same invoice paid in 80 days can be expensive.
Use the invoice finance cost calculator with a real quote to see the cost per $100 advanced and per 30 days, which lets you compare it with a line of credit or a short-term loan on similar terms.
Risks and fine print
- Recourse. Most facilities are recourse, meaning bad debts come back to you.
- Concentration limits. Providers may cap how much one customer can represent.
- Disputed invoices. Invoices in dispute are usually excluded or clawed back.
- Lock-in. Minimum terms, notice periods and exit fees can make leaving costly.
- Security. A general security agreement over business assets is common.
Slow payers are also worth tackling directly. The business.gov.au guidance on payment terms and our guide to options for slow-paying customers cover the non-finance fixes too.
An illustrative example
A made-up labour hire business invoices construction companies weekly on 45-day terms. Wages are paid weekly, so the business is always several weeks of payroll ahead of its customers. As it wins more contracts, the gap grows.
An invoice discounting facility lets the business draw an agreed percentage of each new invoice within a day or two. When customers pay, the facility is repaid and the balance, less fees, comes back to the business. The limit rises as invoicing grows, so new contracts no longer strain cash flow. The owner tracks the cost per invoice each month to make sure the facility remains cheaper than the alternatives.
If the same business sold mostly to small customers who often disputed invoices, the facility would be less useful, because disputed invoices are usually excluded.
Is invoice finance right for your business?
Invoice finance tends to work well for businesses that invoice creditworthy business customers on terms, are growing, and want funding that rises with their sales. It is a poor fit for cash, card or consumer sales, or for businesses with frequent invoice disputes. If you would like to explore it, make one enquiry. There is no credit check when you first enquire, and your details go to one lending partner rather than a crowd. Include your typical invoice size, payment terms and monthly sales in the enquiry form, so the options you hear about fit your ledger.
Frequently asked questions
What is the difference between factoring and invoice discounting?
With factoring, the provider usually manages your sales ledger and collects from customers, who pay the provider directly. With invoice discounting, you keep control of collections and the arrangement is often not disclosed to customers. Discounting generally suits larger, well-organised businesses.
How much of an invoice can I get upfront?
A percentage of the invoice value, set by the provider based on your customers' quality, your industry and the facility type. The rest, less fees, is paid when your customer pays.
What is recourse factoring?
With recourse, if a customer does not pay, you must repay the advance or replace the invoice. With non-recourse, the provider bears the credit risk on approved customers, usually for a higher fee and with conditions.
Can I finance just one invoice?
Some providers offer selective or single-invoice finance, which lets you choose invoices as needed. Whole-of-ledger facilities usually cost less per invoice but require you to put all invoices through.
Sources and further reading
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