Invoice finance: unlocking cash tied up in unpaid invoices

If your company sells to other businesses on 30, 60 or 90 day terms, a big slice of its money is sitting in other people’s bank accounts. That’s normal, but it hurts when you’re growing, because each new customer adds to the pile of unpaid invoices before it adds anything to the bank balance. Invoice finance turns that pile into usable cash.

How does invoice finance work?

You issue an invoice to a business customer as usual. The finance provider advances a portion of its value to your company, often within a day or two of the invoice being verified. When the customer pays, the provider releases the remainder to you, minus its fees. Across a whole ledger, this becomes a facility whose limit rises and falls with your sales.

A simple illustrative example: a labour hire company issues $80,000 of invoices on 45-day terms. With an advance of, say, 80% of the invoice value, it receives $64,000 straight away to cover wages. When customers pay at day 45, the remaining $16,000, less fees, comes through. The exact advance rate depends on the provider and your debtors.

Factoring or discounting: which is which?

The two main forms differ mostly in who talks to your customers.

	Factoring	Invoice discounting
Who collects	Usually the finance provider	Your company, as normal
Do customers know?	Usually yes	Often confidential
Typical user	Smaller or growing companies	Established companies with credit control
Reporting	Invoice by invoice	Regular ledger reports
Admin burden	Lower for you	Higher for you

Neither is better in general. Factoring takes collections off your plate, which some owners value. Discounting keeps customer relationships entirely in your hands.

What does the lender actually assess?

This is where invoice finance differs most from unsecured loans. The provider is really lending against your customers’ promise to pay, so it looks closely at:

• Debtor quality. Are your customers established businesses with a record of paying?
• Concentration. If one customer makes up most of the ledger, the risk is concentrated and limits may be capped.
• Dilution. How often invoices are reduced by credits, disputes or returns.
• Invoice clarity. Clean invoices tied to completed work or delivered goods are easiest to fund.
• Your systems. Accurate, up-to-date accounting software makes everything faster.

Your company’s own credit history still matters, and directors usually sign a guarantee, but a younger company with blue-chip customers can sometimes access invoice finance more easily than a term loan. Our director guarantees and security page explains the general security agreements that commonly sit behind these facilities.

Getting ready for an invoice finance application

Providers move fastest when the paperwork is already organised. Before you apply, it helps to pull together:

1. An aged debtors report showing who owes what, and for how long.
2. A list of your top customers with their share of annual sales.
3. Sample invoices and, where relevant, the contracts or purchase orders behind them.
4. Recent business bank statements and your latest financial statements.
5. Details of any existing security, such as a general security agreement already registered on the PPSR by another lender.

That last point trips up a lot of companies. If an existing lender holds a general security agreement over all present and after-acquired property, it may already have a claim over your receivables, and the invoice financier will need it released or subordinated before funding. Sorting that out early can save a week.

It’s also worth tidying any old, disputed or very overdue invoices before the provider reviews your ledger. Invoices more than 90 days past due are commonly excluded from funding anyway, and a ledger full of them can make the remaining debtors look riskier than they are.

What does invoice finance cost?

Costs are usually made up of a service or administration fee, a charge on funds advanced, and sometimes establishment, minimum usage or exit fees. Because each provider structures this differently, compare quotes on the total cost for a typical month of your ledger rather than on any single figure. Watch especially for minimum monthly fees and long notice periods to exit.

Who suits invoice finance and who doesn’t?

It tends to suit wholesalers, manufacturers, labour hire, transport, cleaning and facilities companies, IT services and other business-to-business operators. It doesn’t work for companies that sell mainly to consumers, those paid upfront, or those whose invoices are often disputed. Construction is possible but specialised, because progress claims and retentions complicate things; see our trades and construction page for alternatives.

If debtor timing is only one part of your cash flow story, a business line of credit may be simpler and cover more situations.

Is your sales ledger a funding source?

If you invoice other businesses and wait too long to get paid, it may well be. Tell us about your customers and terms through our short enquiry. There’s no credit check to ask, your details aren’t distributed to a list of financiers, and a real person will tell you whether invoice finance, a line of credit or another structure fits best. Accurate answers on debtor terms and customer concentration help us get that right first time. Talk to us about your invoices.