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)
Business waiting for invoices to be paid request to access finance of $61,877 on average, according to our data. Construction & Trades, Professional Services and Manufacturing are the industries most commonly affected, with borrowers trading for an average of 4.9 years.
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.
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
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.
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
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.