Loan basics
Invoice Factoring Explained for Australian Businesses
Learn how invoice factoring works, how it differs from other invoice finance, and what to consider when comparing providers in Australia.
- Published
- Reading time
- 6 min read
Key takeaways
- Invoice factoring lets a business sell unpaid customer invoices to a finance provider so it can access funds before its customers pay.
- In a factoring arrangement, the provider usually takes over collecting payment from customers, which sets it apart from some other types of invoice finance.
- Costs, advance amounts, terms and eligibility vary between providers and depend on each provider's current policy.
- Business Loan Store compares invoice finance from verified lenders and is not a lender itself.
- Moneysmart and business.gov.au both publish general guidance on business borrowing.
Invoice factoring is a form of invoice finance where a business sells its unpaid customer invoices to a finance provider in return for earlier access to the money owed. The provider usually collects payment from the customer and then passes on the remaining balance, minus its fees. Costs, advance amounts, terms and eligibility differ between providers and depend on each provider’s current policy.
If invoice factoring is on your shortlist, you can see if you qualify. Eligibility depends on each lender’s assessment.
What is invoice factoring?
Invoice factoring means selling outstanding invoices to a third party so a business can use cash that would otherwise stay in accounts receivable until customers pay. The business gets part of the invoice value early, and the factoring provider waits for the customer’s payment.
Many businesses look at factoring because of the gap between sending an invoice and getting paid. For example, a wholesaler that supplies retailers on payment terms may still need to pay staff, rent and suppliers while it waits for those retailers to pay.
Factoring is one option within cashflow and invoice finance, a broader group of funding linked to a business’s sales and receivables. The Australian Government’s business.gov.au has general information on finance and funding options. For a closer look at how the terms relate to each other, see invoice finance vs debtor finance vs factoring.
How does invoice factoring work, step by step?
Invoice factoring follows a cycle. The business invoices its customer, the provider advances part of the invoice value, and the balance is settled once the customer pays. A typical sequence looks like this:
- Invoice issued. The business supplies goods or services and sends an invoice to its customer.
- Invoice submitted. The business gives the invoice to a factoring provider, which assesses it under its own lending criteria.
- Advance released. If the provider accepts the invoice, it releases part of the invoice value to the business. The proportion and timing depend on the provider’s current policy.
- Customer pays the provider. The customer pays the invoice to the provider rather than to the business.
- Balance settled. The provider passes the remaining balance to the business after deducting its fees.
Every application is assessed by the provider, and acceptance is not assured.
How does invoice factoring differ from invoice discounting?
The main difference is who collects payment from customers. With factoring, the provider usually manages collections. With invoice discounting, the business usually keeps that role.
Factoring. The provider generally chases and receives customer payments, so customers usually know a third party is involved.
Invoice discounting. The business generally keeps control of its own collections, and the arrangement may be confidential, so customers may not know about it.
Recourse and non-recourse. These terms describe who carries the risk if a customer does not pay. Under a recourse arrangement, the business usually remains responsible for unpaid invoices. Under a non-recourse arrangement, the provider may take on some or all of that risk, depending on the contract. Whether either option is offered depends on the provider.
Each structure has its own trade-offs. The right fit depends on a business’s circumstances and on the terms a provider offers.
What are the potential benefits and drawbacks?
Factoring can release cash tied up in unpaid invoices, but it comes with fees and gives the business less control over how customers are contacted. Both sides are worth understanding before signing a contract.
Possible benefits
- Access to money held up in unpaid invoices, without waiting for customers to pay.
- Funding that may grow as sales grow, because the amount available is linked to the invoices a business issues.
Possible drawbacks
- Fees reduce the amount the business ultimately receives for each invoice.
- Customers may deal directly with a third party about payments, which may affect how they see the business relationship.
- The business may have less control over how and when collections happen.
Fee structures differ between providers, so check each provider’s own published material and contract terms. The tax and GST treatment of factoring can depend on how an arrangement is set up. The Australian Taxation Office publishes general information for businesses.
What may providers look at when assessing an application?
Each factoring provider sets its own criteria, so what one provider looks at may not match another. Common examples include the types of customers being invoiced, the quality of the invoices and the business’s trading history.
A provider might, for instance, look at whether invoices are for goods or services already delivered and whether the customers have a reliable payment record. These are general examples only. Criteria vary by provider, and no outcome is assured.
Moneysmart has general guidance on reading finance terms and understanding costs before agreeing to them.
Comparing invoice finance options with Business Loan Store
Business Loan Store is an Australian business-finance marketplace that helps businesses compare options and discover lenders. It does not lend money itself.
The site offers comparison, lender discovery and a Help Centre. It covers invoice finance, cashflow finance and other types of business finance from verified lenders, and you can compare factoring options in one place. By default, results are listed alphabetically by lender, and lenders cannot pay to appear or to be placed higher. Lender details on the site come only from each lender’s own published material.
Business Loan Store can be contacted through the website form between 9am and 5pm AEST, Monday to Friday. To check whether a credit provider holds a licence, ASIC publishes resources on credit licensing.
The next step is to start your application. It takes a few minutes to start, and it helps to have basic details about your business and how you invoice your customers ready. Whether you qualify depends on each lender’s own assessment.
This is general information only and does not take into account your objectives, financial situation or needs. All applications are subject to lending criteria, assessment and approval. Fees and charges may apply.
Questions about this topic
What is the difference between invoice factoring and invoice discounting?
The key difference is who handles collections. With factoring, the provider usually collects payment from customers. With invoice discounting, the business usually collects payments itself, and the arrangement may be kept confidential.
Will my customers know I am using invoice factoring?
In most cases, yes. The factoring provider usually collects payment directly, so customers are typically aware that a third party is involved. Confidential arrangements are more often linked with invoice discounting, depending on the provider.
How much does invoice factoring cost?
Costs vary between providers and depend on each provider's current policy and fee structure. Fees are deducted from the invoice value, which reduces the amount the business receives. Checking each provider's published material and contract terms helps clarify the full cost, and Moneysmart has general guidance on understanding finance costs.
Is invoice factoring a loan?
Invoice factoring is generally set up as a sale of invoices to a provider rather than a traditional loan. The exact legal and contractual structure depends on the provider and the agreement. The ATO has general business tax information on how arrangements like this may be treated.
Is Business Loan Store an invoice factoring provider?
No. Business Loan Store is a business-finance marketplace, not a lender. It compares invoice finance and other business finance from verified lenders. This is general information only and does not take into account your objectives, financial situation or needs. All applications are subject to lending criteria, assessment and approval. Fees and charges may apply.