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Business invoice financing is on the rise in Australia. It’s becoming an increasingly popular way to release precious cash flow. It’s one of the 10 small business loan options available to SME’s.

Invoice factoring – what is it?

Invoice factoring, also known as ‘accounts receivable finance’ or ‘invoice finance’ or simply “factoring”, is a type of business finance that can offer a quick boost to your cash flow.

The factor will then collect payment from your customer and pay you the remainder of the receivable, keeping a percentage as their fee.

Are there different types of factoring?

Recourse Factoring In recourse factoring, the risk remains with you – if your customer doesn’t pay their invoice, you will have to buy back the receivable from the factoring company, and chase up the bad debt yourself.
Non-Recourse Factoring If you opt for non-recourse factoring, you sell the debt and the risk to the factor. Once the transaction is done, the factor is responsible for pursuing the debt. Unsurprisingly, you can expect to pay higher fees for non-recourse factoring. Not every factor will offer it, and it’s likely that it will only be offered for invoices where your customer has a solid credit record.
You may also come across ‘whole ledge’ vs ‘spot factoring’. With whole ledge factoring you are required to sell ALL invoices relating to a particular company to the factor. Spot factoring, or ‘single invoice discounting’, allows you to pick and choose which invoices you want to sell, giving you much more flexibility (often at a higher cost).

How does factoring work?

The factoring process is very straightforward. Once you’ve sent an invoice to a customer, you send a copy to the factoring company, who will verify the invoice to make sure you supplied the goods or services listed. They will then send you the agreed percentage as an advance, usually within 24 hours. Once your customer has paid their invoice, the factor will deduct their fees and send you the remaining funds (the ‘rebate’).
Receive Invoices from your Customers
Send your customer your invoice
Provide your Bank Statements
Send the invoice to the factor company
Prepare your Business Loan
Factor company checks the invoice and verifies the service was completed
Get a Business Loan Quick
Customer makes payment and the invoice forwards you the last remaining portion minus fees
Get a Business Loan
The factor advances you a large portion of the invoice
Business Loans - Get the Money
Customer makes payment and the invoice forwards you the last remaining portion minus fees

Who offers invoice factoring?

When it comes to choosing a provider for invoice factoring, you have a wide range of choices. Both the high street banks and an ever-growing number of alternative finance providers – including online ‘fintech’ lenders – offer it as a service. These online lenders will offer other SME’s finance options like a line of credit or unsecured business loans. However several of these lenders specialise in invoice factoring, including some that offer complete flexibility with single invoice finance.

How do I choose a provider for invoice factoring

Be aware that fees, terms and conditions vary considerably, and that alternative lenders are not subject to the same kind of regulations that the big banks have to adhere to – so shop around before you decide. Some lenders will require you to sign up for a long-term contract, while others allow more flexibility – but may charge you more for it.

Take the time to understand how to apply for business finance and what to watch out for.

The most important thing to look for is transparency. Be sure you know exactly what fees, penalties and restrictions will apply before you sign up for any long-term contract, as well as how the factor goes about collecting the debts. Remember that their conduct could impact on your relationship with your customers.

How much does invoice factoring cost?

The fees will vary considerably between lenders. There are also several other factors that will have an impact on the cost you pay for each invoice:

  • The creditworthiness of the customer
  • The volume of invoices you are factoring
  • Your industry / business model
  • The payment terms – you’ll obviously pay more for an invoice that is due in 90 days than one payable within 30.

You can expect to pay a ‘factoring fee’ which is a percentage of the invoice amount. This will generally be somewhere between 1.5% and 4.5% per 30 days outstanding. There may be other costs such as admin charges and money transfer fees.

Invoice factoring example

Invoice value $10,000
Fee (3%) $300
Initial advance (85% of invoice value after fee) $8,245
Remaining advance (12%) $1,455
Total received $9,700

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What are the advantages and disadvantages?

There are some major advantages to factoring – primarily the impact on your cash flow. Getting a cash advance lets you cover the cost of doing business without making a dent in your working capital. However, there are some pitfalls to look out for too.

Pros Cons
  • Immediate cash injection – funds can be in your account within 24 hours.
  • You avoid the hassle of collecting debts, freeing up your time to concentrate on your business.
  • Your customers may be more likely to pay on time when a factor is collecting the debt.
  • Factoring companies often perform credit assessments on your customers. You may be able to use the information they provide to negotiate better payment terms with your customers.
  • Quick and easy to arrange – usually no lengthy application process or onerous criteria.
  • Availability depends more on your customers’ credit ratings than your own, so even startups and businesses with bad credit may be able to access factoring.
  • With some factoring providers you can pick and choose which invoices you sell, when – giving you total flexibility and the ability to get a quick cash injection when you need it.
  • Factoring isn’t a loan, so you won’t be taking on debt or paying interest – and it won’t show up on your balance sheet.
  • It can allow you to offer more generous payment terms to customers, potentially securing you more business.
  • If you opt for non-recourse factoring you’ll avoid the risk of late payment or bad debts.
  • Factoring can be more expensive than other forms of short term finance, especially where there are hidden charges. Be sure that you know the TOTAL cost, including admin fees, transfer charges and any penalties, before you choose a provider.
  • Factoring reduces your profit margin on each invoice you sell.
  • It can damage your relationship with your customers – they no longer deal exclusively with you, and the factor may use aggressive collection methods. It can also indicate to your customers that you have cash flow problems, potentially making them wary about dealing with you.
  • Some providers will seek to lock you into long-term contracts where you are required to sell them a minimum volume of invoices, or all invoices for particular customers. This can be detrimental to your business, especially if there are heavy penalties for breaking the contract.
  • The availability and cost of factoring will depend on your customers’ credit ratings rather than your own. Some lenders may seek to restrict you from doing business with certain customers.
  • With recourse financing, you will have to buy back any invoices where the factor has been unable to collect payment.
  • If you decide to end your arrangement with the factor you’ll have to buy back any unpaid invoices, which could have a big impact on your cash flow.

How do I know if factoring is right for my business?

Given that around 90% of small businesses that fail do so because of poor cash flow, factoring can be an incredibly valuable resource.

It tends to be most beneficial to businesses that have to pay up front costs in order to do business. For example, if you have to pay for your raw materials, transport costs and wages before you’ll receive payment from your customer, factoring can give you the cash to cover those costs as they fall due.

It can also be of great benefit if you’re in an industry where customers expect long payment terms, or where offering longer payment terms can give you a competitive advantage.

As with any business financing decision, it’s important to seek professional advice before you enter into any factoring arrangement.

How do I know if factoring is right for my business?

Factoring is generally quick and easy to set up. Your business won’t be taking on any debt, so you won’t have to go through the rigorous application and appraisal process that you can expect with many other types of business finance.

You’ll need to complete a simple application form and supply supporting documents including:

  • ID documents
  • A list of your customers
  • Copies of the invoices you want to factor
  • An aging report for your accounts receivables, showing how long those customers generally take to pay
  • Access to your accounting system

It usually takes around 3 – 5 days for your application to be assessed. Once you’ve been approved you can start factoring your invoices right away.

Use our calculator to see how invoice finance can help your business.


What is invoice finance?

Invoice finance is a type of business finance that does not involve borrowing. Invoice finance allows a business to sell its outstanding accounts receivables (invoices) to a 3rd party at a discount.

How can I get invoice finance?

Invoice finance is a common form of business finance available from some fintech lenders and banks. You maybe able to obtain invoice finance if you have credit-worthy customers that pay you within your credit terms.

What does factoring mean?

Factoring is a type of debtor finance. A factor is a third party that finances outstanding accounts receivable (i.e. invoices). The factor will buy the invoices at a discount, and then collect the full invoice amount from the customer.

How much does invoice finance cost?

The cost of invoice finance can vary, depending on the factor and your customers. However, as a guide you could expect to sell your invoices for a discount of 1.5-10%, depending on the credit terms.

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