What is Invoice Finance?
Invoice finance - also known as accounts receivable finance, or factoring - is a type of business finance that allows a business to sell its outstanding accounts receivables (invoices) to a third party for a percentage of the total invoice amount. It allows a business to access funds quickly, without taking on a business loan that will accrue interest.
In this invoice finance guide, you’ll learn:
- How invoice finance works
- How to apply for invoice finance
- Who can benefit from invoice finance
- The documentation you will need to apply
- How to compare lenders, factor rates and terms
How does Invoice Finance work?
Invoice finance is known as ‘factoring’. A factor is a third party that finances outstanding accounts receivable (invoices). The factor will buy invoices from a business, then collect full payment from the customer and pay the business the remainder of the invoice, keeping a pre-agreed percentage as their fee.
Invoice Finance in Seven Simple Steps:
- You send an invoice to a customer for $20,000
- You send the invoice to the factor
- The factor company agrees to charge you a fee (~3%) on the invoice amount
- The factor advances you a majority of the invoice amount in advance (85%)
- The factor awaits payment from your customer
- The customer makes payment to the factor
- The factor pays you the remaining invoice amount (12%) minus their fee.
Invoice Finance Cash Advance Example
|Invoice Amount||Factor Fee (3%)||Advance (85%)||Remaining (12%)||Total Finance|
Depending on the value and amount of invoices you sell to a factor, you may receive different factor rates or advance amounts.
What types of Invoice Finance are available?
Invoice finance is often available either as recourse or non-recourse factoring, and through a whole ledger factoring or spot factoring agreement. You can see how these types of invoice finance work in the tables below.
Recourse versus Non-Recourse Factoring Comparison
|Recourse Factoring||Non-Recourse Factoring|
If your business qualifies for business finance, it can often be a less risky option than other forms of small business finance. For example, as invoice finance is not a loan but an advance of cash on your business invoices, you won't pay high rates of interest as you would on an unsecured business loan.
Whole Ledger Factoring versus Spot Factoring Comparison
|Whole Ledger Factoring||Spot Factoring|
How do I apply for Invoice Finance?
You can apply for invoice finance through a number of different lenders. Many banks will offer invoice finance, along with a growing number of non-bank and specialist factoring lenders. Keep in mind that each lender will have different criteria for approval, and the approval time will vary for each lender as well. Typically, alternative lenders will give faster approval than banks.
You can apply for invoice finance with:
- Your bank
- Non-bank lenders
- Specialist factoring lenders
Applying for invoice finance is generally a quick and simple process. As you aren’t taking on a loan - i.e. debt - most factoring providers will have an easy online application and won’t require extensive documentation.
Alternative lenders tend to process applications very quickly, which means your invoice finance can usually be set up within a day or two.
Who can get Invoice Finance?
You can qualify for invoice finance if you operate a business which provides a service or product to customers without immediate payment - i.e. your business sends an invoice to customers. While many different types of businesses can apply for invoice finance, it is often most beneficial to businesses that have to pay up-front costs to operate.
In Australia, invoice finance is often used by companies experiencing regular payment delays from customers, including:
- Labour hire
- Mining services
- Commercial property services
How do I qualify for invoice finance?
Most lenders will be able to provide invoice finance if you have:
- Been trading for at least 6 months; and
- Have an ABN (Australian Business Number); and
- Are registered for GST; and
- Operate a business which invoices customers; and
- Use an accounting software program (ie Xero, MYOB)
Invoice finance allows a business to purchase materials, pay wages, or cover transport costs, without having to worry about cash flow due to late payments from customers.
What is the Invoice Finance application process?
The process for setting up invoice finance is fairly simple. As your business won’t be taking on any debt, approval should be quicker than a standard loan application, and will often require less-exhaustive documentation. You’ll need to complete a simple application form and supply supporting documents.
Here’s what you may need to provide to a lender when applying for invoice finance:
- Proof of identity
- An ABN and GST registration
- A list of your customers
- Copies of the invoices you want to factor
- A report for your accounts receivables, showing how frequently customers pay their invoices
- Business bank statements
Approval time will vary from lender to lender, but it may take up to 5 days for an invoice finance application to be assessed and approved. Some lenders will provide same-day approval.
How much can I borrow with Invoice Finance?
The amount you can receive from invoice finance will depend on the value of your invoices and the willingness of the factor to take them on. In general, most factors will advertise a maximum amount of $1,000,000 although some lenders offer a maximum invoice finance amount of $100,000,000.
Invoice Finance Minimum and Maximum Amounts
|Minimum Amount||Maximum Amount|
Invoice factoring does not give you extra funds to invest in your business. It simply brings forward the receipt of payment.
What is the term or length of Invoice Finance?
The term or length of an invoice finance agreement can be anywhere from one month to over a year. The term of your invoice finance with a factor will depend on the specific lender you apply with, though some may require you to agree to a 12-month contract, or charge fees for a shorter agreement period.
Invoice Finance Minimum and Maximum Terms
|Minimum Term||Maximum Term|
|1 month||12 months +|
Some lenders may ask you to commit to selling all of your invoices for a set period of time - e.g. 12 months. While this provides less flexibility for your business, it may result in a lower factor fee.
What fees will I pay on Invoice Finance?
Invoice finance uses a ‘factor fee’ - a percentage of the invoice amount, and will generally be between 1.5% - 4.5%. The factor fee is the amount taken by the lender in return for their factoring services. Factor fees will vary depending on the lender, the agreed invoice financing term, the volume of invoices you are factoring, and more.
There are also other considerations specific to your business and customers, including:
- The creditworthiness of the customer
- The reliability of payment from customers
- The industry your business operates in
- The payment terms of your invoices - you’ll pay more on an invoice due in 90 days than one due in 30.
Invoice Finance Interest Rates Lender Comparison
|Term||Factor Fee||Minimum Invoice Amount|
|Lender 1||1 - 3 months||4.5%||$10,000|
|Lender 2||6 - 12 months||2%||$10,000|
|Lender 3||Minimum 12 months||1.5%||$10,000|
Invoice Finance Summary
Invoice finance is a common form of business finance in Australia, where a business will sell its invoices to a third-party company - a factor - who in return will advance a large portion of the invoice amount to the business. It doesn’t require collateral and the amount you can borrow will be equal to the value of your invoices (minus the factor’s fee).
In summary, invoice finance:
- Is easy to set up
- Is offered by a variety of business finance lenders
- Once set up, allows for very fast access to cash
- Is highly beneficial to small businesses or those operating with upfront costs
- Uses outsourced payment collection for a small fee
- Can be very useful if your business has reliable customers
Invoice Finance Pros and Cons
Invoice Finance FAQ
Will my customers know I’m using an invoice factor company?
If your factoring company using invoice discounting, then their collection method to customers will be anonymous. Generally, standard factoring will indicate to a customer that their invoices have been sold. Factoring companies will indicate which type of collection they use, so be sure to research carefully if this is a major concern for your business.
What happens if a customer pays the business instead of the factor?
If you’ve sold your invoices to a factoring company and the customer accidentally pays you instead, it’s important that you indicate this to the factoring company as soon as possible. If you remain transparent in the process, you’ll maintain a healthy relationship with the factor.
What happens if a customer doesn’t pay an invoice to a factor?
Depending on which type of invoice finance you choose to accept with a factor, you may have to buy back the unpaid invoices - i.e. repay the invoice advance - and chase the customer for payment yourself, which is called recourse factoring. If you opt for non-recourse factoring, the factoring company will not require you to buy back any unpaid invoices.
Who is responsible for collecting payment from the customer?
The factor will be responsible for collecting payment from your customers. However, depending on the type of invoice finance you agree to, you may be required to buy back any unpaid invoices from the factor and seek to collect payment from customers yourself.
How to compare invoice financing providers
Advance fees - if your company is financially secure, you’ll likely receive a rate around 3%. However, if a lender has reason to believe your customers are at risk of not paying, they may increase this significantly.
Additional fees - transaction fees or early payment discounts applied to your customer invoices.
Penalties - each lender will have an individual policy around non-payment or late payment from your customers. It’s crucial you understand these to ensure you aren’t left with an unserviceable debt.
Do I need to put down a deposit or security on invoice finance?
No, you do not need to put down a deposit or security on invoice finance. The outstanding invoices provided by your business will act as sufficient security.
Can I be approved for invoice finance if I have bad credit?
Yes, you can be approved for invoice finance if you have bad credit. Your eligibility for invoice finance with a factoring company will depend on the invoice value and repayment stability of your customers, not your individual credit profile.