The short answer
Invoice finance is funding secured against the money your business customers owe you. Instead of waiting 30 to 90 days for an invoice to be paid, the business receives an advance of commonly around 70% to 90% of the invoice value, and the rest, less fees, when the customer pays. It's also called debtor finance, receivables finance or invoice discounting. Facilities come in two main shapes: selective or single-invoice finance, where you choose which invoices to fund, and whole-of-ledger facilities, where the lender funds your approved debtor book on an ongoing basis. With factoring, the lender manages collections and customers are told. With confidential invoice discounting, you keep collecting and customers deal with you as normal. Costs usually combine a discount fee or interest on funds drawn with a service fee. It suits growing business-to-business companies with creditworthy customers, and doesn't suit sales to consumers.
How does invoice finance work?
- You deliver the work and issue an invoice to a business customer.
- The lender verifies the invoice and advances an agreed percentage, often within a day.
- Your customer pays the invoice, either to you or to an account the lender controls.
- The lender releases the remaining balance, less its fees.
What types of invoice finance are there?
| Type | How it works | Customers notified? | Suits |
|---|---|---|---|
| Selective (single invoice) | Fund individual invoices when you choose | Often yes | Occasional large invoices or one slow-paying customer |
| Whole-of-ledger debtor finance | A revolving limit against your approved debtor book | Depends on the facility | Businesses invoicing every week |
| Factoring | The lender buys the invoices and handles collections | Yes | Businesses without a credit control team |
| Confidential invoice discounting | You keep collecting and customers pay as normal | No | Established businesses with strong reporting |
What does invoice finance cost?
Pricing differs between selective and ongoing facilities. A selective facility usually charges a fee per invoice that reflects how long it stays unpaid. A debtor finance facility usually charges interest on the funds drawn plus a monthly service or administration fee.
Take a $40,000 invoice on 60-day terms that's actually paid in 45 days. With an 80% advance, the business receives $32,000 upfront. If the fee is an assumed 2.5% of the invoice value, it costs $1,000, and the business receives $7,000 when the customer pays. Compare that against the cost of losing the contract, or of paying suppliers late.
Example only. It isn't a real client, and the pricing is an assumption for illustration. Your cost depends on the lender and your business. Run your own numbers in the repayment calculator.
Which invoices qualify?
- Invoices to creditworthy business or government customers, not consumers.
- Work that's complete and accepted, so the customer can't dispute it.
- Invoices under about 90 days old, depending on the lender.
- No related-party customers and no contra arrangements where you also owe the customer money.
Construction progress claims and retentions are a special case. Many invoice lenders exclude them because the claim can be disputed or set off. Specialist lenders do fund some progress claims, so tell your broker if this applies to you.
What do lenders look at?
An invoice lender looks harder at your customers than at you: who they are, how they pay and how concentrated the ledger is. A business with one customer making up most of its invoices will usually get a lower advance rate. Lenders also look at credit notes and disputes, the ageing of the ledger and your reporting systems. If your bank already holds a general security interest over the business, the invoice lender will usually need a priority arrangement so it ranks first over the receivables.
When does invoice finance make sense?
It fits growing businesses whose customers are good for the money but slow to pay, such as labour hire, transport, wholesale, manufacturing and professional services. It's less suitable for businesses selling to consumers, for one-off needs better met by a short-term loan, or where most income comes from progress claims.
