Invoice and Debtor Finance For Small Business

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What is invoice finance?

Invoice finance, also known as debtor finance or ‘factoring’, is a popular alternative business finance option that allows small and medium-sized enterprises (SMEs) to borrow against the value of their outstanding invoices.

Invoice funding has simple eligibility requirements and is available to most Australian businesses
26% of construction and trades businesses use invoice finance, according to Lend proprietary data
Recourse factoring is the most common type of factoring agreement
Factoring fees range from 3% to 8% of the invoice value (much cheaper than a bank loan)

How debtor finance works

The basics...

Businesses can sell their unpaid invoices to a third-party company (or factor) and get up to 80% of their value in advance. Depending on the type of arrangement, either you continue to manage the collection of owed invoice amounts, or the lender will take over that responsibility.

This alternative financing option allows businesses to unlock cash tied up in unpaid invoices instead of taking on a business loan that will accrue interest. It's also typically much easier to qualify for invoice factoring as it doesn’t require collateral, a perfect business credit score, or a long trading history.

Invoice finance rates (factor fees)

Invoice factor fees are calculated as a percentage of the invoice amount — usually between 3% and 8%. There may be other costs such as admin charges, invoice processing fees, money transfer fees, etc.

Fees will vary between lenders and conditions specific to your business and customers, including the volume and value of invoices you’re factoring, the creditworthiness of your customers, your industry and business model, the payment terms (you’ll pay more for an invoice due in 90 days than one payable within 30 days).

Pro tip: Invoice factoring is not confidential by default, so choose your provider carefully if you don’t want customers notified of the financing arrangement. Invoice factoring is sometimes referred to as invoice discounting or debtor finance.

Invoice finance example

Invoice client

You send an invoice to a client for $20,000 & submit the invoice to the factor (lender) usually via an online portal

Invoice verified

The factor company checks the invoice and verifies you supplied the goods or services listed

Receive funds

The factor pays you 80% ($16,000) portion of the invoice amount in advance

Client pays

Your client makes payment for the full invoice invoice amount

Remaining funds released

The factor pays you the remaining invoice amount minus their fees

Types of invoice factoring in Australia

Recourse factoring

This is the most common type of invoice factoring whereby your business remains responsible for any invoices your customers fail to pay.

In this case, you would buy back the outstanding receivables and chase up the debt(s) yourself. Recourse factoring is usually cheaper and easier to access than non-recourse factoring because your business carries the debt risk. The factor does not take on the risk of bad debts.

Non-recourse factoring

This is when you sell the debt and risk to the factor, so the factoring company becomes responsible for pursuing customers who still need to make their payments.

In exchange, they charge you a higher fee and may impose stricter criteria for your invoices and customers. Only some factors will offer this option, and it’s likely that it will only be offered for invoices where customers have a solid credit record.

Whole ledger factoring vs spot factoring

Whole ledger factoring, also known as whole turnover factoring, allows your business to draw down funds against your entire accounts receivable (often with a discount).

Spot factoring allows you to pick and choose which invoices you want to sell or sell individual invoices, giving you much more flexibility (often at a higher cost).

Invoice factoring vs invoice discounting

Invoice factoring is when you sell your unpaid invoices to a factoring company outright, while invoice discounting works similarly to a loan secured against your outstanding invoices.

This is an important distinction because invoice discounting allows for confidentiality (since you retain ownership of your invoices), while factoring is harder to hide from your customers.

Pros and cons of invoice finance

Pros

Fast access to cash

You can get funds within minutes of submitting an invoice to the lender.

Flexible collection options

You can choose to handle debt collection yourself or let the factor manage it.

Usually confidential

Most arrangements are private — your clients won’t know you’re using finance.

Bad credit? No problem

Approval is based on your customers’ credit ratings, not yours.

No debt involved

It’s not a loan, so there’s no interest, no repayments, and nothing on your balance sheet.

Improves cashflow flexibility

Instant funds let you offer longer payment terms to clients or suppliers.

Pick and choose invoices

Some providers let you decide which invoices to finance and when.

Quick and easy setup

Minimal paperwork and fast approval make it accessible for many businesses.

Cons

Higher cost than loans

Fees and charges can add up quickly, making it more expensive than secured finance.

Reduced profit margins

You won’t receive the full invoice value, which eats into your margins.

Customer relationships at risk

Some providers may use aggressive debt collection practices.

Reliant on client credit

If your customers have poor credit, it may limit your funding options.

You may need to buy back invoices

With recourse factoring, you’re liable for invoices the factor can’t collect.

Seasonal limitations

Access to funds may drop during off-peak trading periods.

Exiting can be costly

Ending a factoring agreement may require repurchasing unpaid invoices.

Ongoing liability with recourse

You take on the risk if your clients fail to pay their invoices.

Risk of restrictive contracts

Some providers may lock you into minimum volume agreements with exit penalties.

How to apply for invoice finance

When applying for invoice finance, you’ll need to complete a simple application form and supply supporting documents, including:

Identification documents
Business registration information
Copies of the invoices you want to factor
A report for your accounts receivable, showing how frequently customers pay their invoices
Access to your accounting system
Business bank statements

Factoring is generally quick and easy to set up since your business is not taking on debt. You won’t have to go through the rigorous application and appraisal process you’d expect with other types of business finance or bank loans.

The turnaround time for invoice finance approval is usually 24 hours or more. Once you’ve been approved, you can start factoring your invoices right away. Use our business loan calculator to see how invoice finance can help your business.

Is invoice factoring right for your business?

Invoice factoring can be a suitable option for businesses who need quick access to cashflow or have upfront costs piling up and need a cash advance while waiting for customer payments. For example, if you have to pay for your raw materials, transport costs and wages before receiving payment from your customers, factoring can give you the cash to cover those costs as they fall due.

It can also benefit businesses in industries where customers expect long payment terms (e.g. construction) or where offering extended payment terms for certain suppliers can give your business a competitive advantage.

Invoice factoring is often the financing option of choice for small businesses who experience cashflow fluctuations or who don’t have any cash reserves to stretch until invoices are paid. It can also help small businesses who scale quickly when expenses exceed working capital. It's sometimes the only option for businesses struggling to access other financing types, such as startups. Take the time to understand how to apply for a business loan and what to watch out for.

Who offers invoice factoring?

Both banks and an ever-growing number of small business online lenders offer invoice factoring. Some online lenders specialise in invoice factoring and offer more flexibility with single invoice finance. Other finance providers will offer a full suite of business finance options alongside invoice factoring, including a business line of credit or unsecured business loans.

Compare invoice finance options

Lender	Advance on invoice	Facility limit	Factor fee	Terms
ABR Finance	70-80%	$10K - $300K	Determined on application	30-90 days
Invoice Money	Up to 90%	$3K - $1m	Flat or split rate	14-90 days
Early Pay	80-90%	$50K - $15m	Determined on application	30-90 days
Butn	Up to 85%	From $5K	Fixed fee	30-90 days
A Positive Workforce Finance	Up to 100%	$0 - $20m	Flat fee or split rate	30-120 days
Moneytech	Up to 90%	$150K - $20m	PAYG fee structure	30-120 days
Octet	Up to 85%	$0 - $20m	Determined on application	Determined on application

More info about invoice finance

FAQs

Factoring is a type of debtor finance. A factor is a third party that finances outstanding invoices. The factor will buy your invoices at a discount, and then collect the full invoice amount from your customer(s). Factors can be banks or independent finance companies.

The difference between invoice financing and factoring comes down to flexibility and confidentiality. With invoice financing, your business can borrow against outstanding invoices and you get to choose which invoice(s) you finance and when. You deal directly with your customers for repayments which means the financing arrangement remains confidential.

On the other hand, invoice factoring involves selling your invoices to a factoring company at a discount. The factoring company will employ a debt collection service to chase up unpaid invoices on your behalf. This allows for less confidentiality since customers will be contacted by a third party to make payment(s).

Invoice factoring is not confidential by default, so be sure to speak to your provider if you’re concerned about it. Generally, standard factoring will indicate to customers their invoices have been sold. However, there are plenty of companies that offer confidential invoice discounting facilities.

The factor will be responsible for collecting payment from your customers. However, if you’re using recourse factoring, you’ll have to buy back any unpaid invoices from the factor and chase up any outstanding debts from your customers yourself.

Your factoring company should make every effort to collect invoice payments on your behalf, but your type of factoring agreement will dictate what happens if your customers fail to pay their invoice(s).

With recourse factoring, you may be required to buy back unpaid invoices and collect outstanding debts yourself. Alternatively, some providers will not require you to cover the outstanding invoice value in the event of non payment, but this scenario will impact your ability to access finance in the future.

With non-recourse factoring, the factor remains responsible for seeking payments and will have to accept the loss if customers don't pay. This is why this option typically incurs higher fees to offset the risk.

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