Last Updated on November 19, 2019

Everything you need to know about debtor financing

If you’re a small business owner, you’ve probably experienced the juggling act between paying suppliers and receiving paid invoices. Debtor finance could help free up some working capital when needed.

Debtor finance allows a business to use money that it is owed before it has been received from the customer.

If you’re invoicing clients on 30, 60 or 90-day terms, it can be a long time before you see the money you’re owed for the product or service you provided.

Debtor finance could help by unlocking the cash in your unpaid invoices, providing a solution to cash flow problems caused by slow-paying clients.

Here’s a quick guide on how debtor financing works, the main two types offered, and whether it could be the right financing solution for your business.

What is debtor finance?

Debtor finance (also known as receivables financing) allows a business to generate working capital by using its accounts receivable ledger as security.

Essentially, a lender purchases unpaid invoices from business owners. Up to 85% is paid upfront, and the rest (minus fees) is paid when the invoice has been settled.

Receiving cash immediately for your invoices rather than having to wait 30 plus days can help you pay company expenses without the worry of ongoing bank fees or taking on extra debt.

Invoice value $30,000
Fee – 2% $600
First instalment (80% of invoice value minus fee) $23,520
Second instalment when the invoice is paid in full $5800
Total received $29,400

Invoice factoring and invoice discounting are the two most common forms of debtor financing.

Invoice factoring

Factoring is a type of short-term business finance solution. Instead of the business taking on debt by borrowing money like a traditional loan, the company’s accounts receivable ledger is sold to a third party (aka a factor) in exchange for instant funds.

Factors can be banks or independent finance companies. With invoice factoring, they take over the control of the debt and chase up the client for payment. In this case, the client will know that you have sold the invoice as a different company will be requesting the payment.

For each invoice, the seller will quickly receive their first instalment of between 70 – 85% of the full invoice amount, usually within 24 hours. The factor then chases up the payment, and once it has been made in full, the second instalment is paid minus any fees.

Fees for invoice factoring typically range from 1.5% to 4.5%.

Things to know about invoice factoring

  1. The factor is in active control of the invoice being paid; they chase the client for payment which saves you the extra hassle of doing it but can also damage customer relationships.
  2. Factoring institutions can have long lock-in contracts and can insist that all invoices the company creates are sold to them.
  3. They need to know the creditworthiness of your customer base to ensure they will receive their payment. So they will carry out credit checks on your clients.

Pros and cons of invoice factoring


  • Can quickly generate available funds to fulfil orders, pay employees and cover essential costs.
  • Improves cash flow—no more waiting 30+ days for an invoice to be paid in full.
  • Relatively low risk—all customers are credit checked by the factor and can be insured.
  • It’s typically quicker to receive funds compared with other forms of business financing.
  • No physical assets are needed for security.
  • Suitable for small businesses.
  • It can allow you to offer longer payment terms to customers, potentially securing you more business.
  • Reduces admin time spent on credit control and chasing customers for payment, freeing up time for core business activities.


  • Typically have to agree to a long term contract with the same company.
  • There can be hidden costs (known as disbursements. For example, fees for admin errors, printing and carrying out credit checks).
  • You give the factor the control of your customer relationships.
  • It exposes your cash flow situation to the clients.
  • It can be costly compared with other forms of business finance.
  • The factor will credit check your clients and can reject bad debtors.
  • The credit limit has a cap on the total cost of the invoices you generate.

Invoice discounting

Invoice discounting is very similar to invoice factoring and offers many of the same benefits, with one main difference: You stay in control of collecting payment from clients. This means you keep 100% control of your customer relationships.

When you apply for invoice discounting, the lender will review your sales ledger, looking at the number of debtors and their creditworthiness, along with the age and value of invoices.

Based on the information found, they will agree to pay a certain amount of the invoice upfront (again usually 70-85%). Then make the second instalment (minus fees) when the invoice has been paid.

With invoice discounting, the limit grows as more invoices are raised. More invoices mean more available funds without extra applications required.

Your customers are unaware of your cash flow needs as they pay into a bank account set up for you by the lender.

Things to know about invoice discounting

  1. Typically, discounting has lower fees than factoring because the lender is not taking control of the admin tasks needed to ensure clients pay. This means customers are unaware of the arrangement because the responsibility of chasing customers for payment is left with you.
  2. On the other hand, the lender trusts you to ensure the invoice gets paid, leaving you with higher admin and follow up costs.
  3. Invoice discounting is usually offered to larger businesses with high turnover and established, trusted payers as the lender needs to see proof of collecting payments in an effective and timely manner. This proof may not be available for small or early-stage businesses.

The pros and cons of invoice discounting


  • Stay in control of credit and collections—client relationships are not affected.
  • Can quickly generate available funds to fulfil orders, pay employees and cover essential costs.
  • Improves cash flow—no more waiting 30+ days for an invoice to be paid in full.
  • It is typically quicker to receive the funds than with other forms of business financing.
  • Cheaper fees than factoring.
  • No physical assets are needed for security.
  • Can be used in place of a line of credit. The business can draw and redraw from the bank account as more invoices are paid.


  • While cheaper than factoring, it can still be more expensive than other forms of business finance.
  • No admin support is offered with following up invoices, but this can be seen as an advantage too.
  • Often unavailable to smaller or early-stage businesses.
  • Typically, companies are unable to discount individual invoices or clients; the entire ledger needs to be funded by the lender.

Should I look into factoring or discounting?

The choice between invoice factoring and invoice discounting may not always be up to you. Some lenders will only offer discounting to larger, more established businesses with a strong client base.

The eligibility criteria for factoring is often lower as the lender takes over the collection process, giving them confidence that the invoice will be paid.

If you do have the option, you need to assess how important keeping control of your customer relationships is for you and your business, as this can be the deciding factor.

Outsourcing the collection process can be great for smaller businesses that have less time and staff available for admin processes. But it can damage client relationships and possibly your reputation with them as they will become aware of your financing needs.

Still have questions? Let’s talk

Confused? Not sure if this applies to your situation? Phone us on 1300 190 429 for some free, no obligation advice.

Or want to compare business loans now?

About the Author

Eleanor Baxter
Eleanor Baxter

Eleanor Baxter has extensive experience writing for the Australian financial and healthcare sectors. Her portfolio includes guides that cover all aspects of both physical and financial health and wellbeing. Coming from a background in communications, fitness, and psychology, she has found a passion for demystifying personal and business finance for the everyday reader. When not at her writing desk, you’ll find Ellie walking her two dogs or practising an asana.

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