Invoice finance explained for Australian businesses

Invoice finance lets a business access funding against eligible unpaid customer invoices. It can help cover wages, stock and suppliers while customers are still within their agreed payment terms. The amount available, cost and collection process depend on the facility and the quality of the debtor book.

For manufacturers, wholesalers, labour hire firms and other business-to-business suppliers, payment terms of 30, 60 or 90 days can leave a gap between paying operating costs and receiving customer payments.

This guide explains how invoice finance works in Australia, the difference between factoring and discounting, what providers assess and how to compare the overall cost.

What is invoice finance?

Invoice finance is funding based on eligible accounts receivable: amounts customers owe for goods or services already supplied. Depending on the structure, the business may borrow against invoices or sell them to a factor. It does not necessarily require property as security, although the provider may take security over receivables or other business assets.

It is generally used by businesses that:

• Sell to other businesses (B2B) on credit terms rather than being paid upfront
• Experience a gap between delivering goods or services and receiving payment
• Have reasonably reliable, creditworthy customers
• Need working capital to fund growth, stock or payroll without waiting on payment terms

It is not typically suited to businesses that sell directly to consumers and are paid at the point of sale, since there are no outstanding invoices to fund.

Unlike a fixed-term loan, the amount available through an invoice finance facility can move with the size of the eligible debtor book. As a business issues more eligible invoices, its available funding may increase, subject to the facility limit and provider's terms.

How does invoice finance work?

The general mechanics are similar across most facilities, though terms vary by provider:

1. The business delivers goods or services and issues an invoice to its customer under normal trading terms.
2. The business submits that invoice, or eligible invoices from its debtor book, to the finance provider.
3. The provider advances an agreed percentage of the eligible invoice value.
4. The customer pays the invoice as usual, either to the business or to a provider-controlled account depending on the facility.
5. The provider releases the remaining balance to the business, less fees and any other amounts payable under the facility.

The exact advance rate, fee structure and process depend on the provider, the industry and the strength of the business's customer base.

Not every unpaid invoice will necessarily be eligible for funding. Providers may apply criteria relating to the customer, invoice age, payment terms, disputes and the proportion of the debtor book represented by individual customers.

Invoice factoring and invoice discounting

Invoice finance is often used as a general term, but there are two common structures with different levels of visibility to customers.

Invoice factoring

The finance provider generally takes a more active role in collecting payment, and customers may be aware that invoices have been assigned to a third party. This can suit smaller businesses or those without an established credit control function, since the provider effectively manages part of that process.

For some businesses, outsourcing collections is useful in its own right because it reduces the internal time spent following up outstanding accounts. Others may prefer to retain direct control of that customer relationship.

Invoice discounting

The business typically retains control of its own credit control and customer relationships, and the facility may operate on a confidential basis, meaning customers are not aware finance is in place. This is more commonly used by larger or more established businesses with their own collections processes.

The distinction matters because invoice finance isn't only about the amount or cost of funding. Businesses should also consider how they want invoices, collections and customer relationships to be managed.

What do finance providers assess?

Providers will generally look at more than just the invoice itself. Common areas of assessment include:

• The creditworthiness and payment history of the business's customers, since they are the ones ultimately expected to pay
• The quality and diversity of the debtor book, including whether revenue is concentrated in one or two large customers
• The business's trading history and industry
• Historical bad debts, disputes or credit notes
• Existing security or finance arrangements over the business's assets
• The completeness and accuracy of invoicing and delivery documentation
• The age of outstanding invoices
• The business's credit control processes
• Any contractual terms that could affect whether an invoice is payable

A business with a diversified base of creditworthy customers and clean invoicing records will generally be viewed more favourably than one with concentrated risk or a history of disputed invoices.

Why customer concentration matters

A business can have a large debtor book without necessarily having a strong debtor book.

For example, if a substantial proportion of outstanding invoices is owed by one customer, the finance provider is heavily exposed to that customer's ability and willingness to pay. If that customer delays payment or disputes an invoice, a significant portion of the facility could be affected.

A broader spread of reliable customers reduces that concentration. Providers may therefore place limits on how much funding they will make available against a single debtor.

This is one reason the quality of the businesses owing the money can be just as important as the financial position of the business applying for invoice finance.

A simple worked example

Assume a wholesale business issues a $100,000 invoice on 60-day terms. Its provider agrees to advance 80% of this eligible invoice before the customer pays. Fees will be deducted in accordance with the facility terms.

In this example, the business could access $80,000 of the invoice value before the customer pays, rather than waiting the full 60 days for payment. The remaining balance is released once the customer pays, less the provider's fees.

The 80% advance rate is illustrative. No fee amount is assumed in this example; actual advance rates, charges and settlement mechanics vary by provider and facility.

Which businesses tend to use invoice finance?

Invoice finance is commonly used across sectors where extended trading terms are standard, including:

• Manufacturing
• Wholesale and distribution
• Import and export businesses
• Labour hire and recruitment
• Transport and logistics
• Business services with large corporate or government clients

It can be used on an ongoing basis to smooth cash flow, or selectively where the facility allows it to fund a specific opportunity, such as a large order that requires upfront stock or labour costs before the customer pays.

Consider a wholesaler that wins a significantly larger order from an established retailer. Fulfilling it may require the wholesaler to pay suppliers, freight and staff well before the retailer's invoice falls due. Strong sales have therefore created a short-term cash requirement rather than immediately putting more cash in the bank.

Invoice finance can help bridge that timing gap without requiring the business to wait for its existing customers to pay before taking on the next order.

What makes an invoice eligible for funding?

An issued invoice doesn't automatically mean the provider will advance money against it.

Eligibility varies between providers, but they may consider whether:

• the goods or services have already been supplied
• the invoice is valid and undisputed
• the customer meets the provider's credit requirements
• the payment terms fall within the facility's criteria
• the invoice is within an acceptable age
• there are contractual rights of set-off or other issues that could reduce the amount ultimately paid

This makes accurate invoicing and good record keeping particularly important. Purchase orders, delivery records, timesheets or other evidence that goods or services were supplied may be required depending on the business and industry.

Can existing business loans affect invoice finance?

Existing business finance can also affect how a new invoice finance facility is structured.

In Australia, a lender may have a registered security interest over a business's present and future assets, including receivables. An invoice finance provider will review relevant registrations on the Personal Property Securities Register (PPSR) and the underlying security documents.

An invoice finance provider may therefore check whether another lender already holds a security interest affecting the business's receivables or other assets. Existing security arrangements may need to be addressed as part of establishing the new facility.

This is another reason it is useful to identify existing business loans and security arrangements before applying rather than treating invoice finance in isolation.

Costs and considerations

Invoice finance is generally priced differently from a term loan, and the total cost depends on factors including the advance rate, the facility limit, the financing fee or discount margin and whether the arrangement is factoring or discounting.

Businesses should also consider:

• Whether the facility covers all invoices or only selected debtors
• Minimum volume or facility utilisation requirements
• Whether the arrangement is disclosed or confidential
• The impact on customer relationships, particularly for factoring arrangements
• Contract length and exit terms
• Establishment, administration or other facility fees
• How charges change when customers take longer to pay
• Any concentration limits applying to major customers
• What happens to invoices that become overdue or disputed

A low headline rate doesn't necessarily mean a facility will have the lowest overall cost. The useful comparison is what the facility is likely to cost based on the business's actual invoice values, customer payment times and expected utilisation.

When might invoice finance be a good fit?

Invoice finance may suit a business when:

• Growth is constrained by slow-paying customers rather than a lack of demand
• The business has a reasonably diversified, creditworthy customer base
• Cash flow needs are directly tied to the sales cycle
• Traditional lending is limited by a lack of property or other fixed-asset security
• The business regularly incurs costs before its customers' invoices are paid
• The debtor book is growing as sales increase

A different type of finance may be more suitable when:

• The business is paid at the point of sale with no outstanding debtor book
• Customer concentration is very high with one or two debtors
• The underlying issue is profitability rather than timing of payment
• Longer-term asset or property finance would better match the funding need
• Invoices are frequently disputed or significantly overdue

Invoice finance addresses the timing of customer payments. If sales do not cover costs, the business needs to address that underlying profitability issue as well.

How to get started

1. Assess the business's debtor book, customer concentration and payment terms.
2. Compare providers' advance rates, fee structures and whether factoring or discounting suits the business.
3. Prepare recent financials, aged debtor reports and sample invoicing documentation.
4. Review existing finance and PPSR security arrangements that may affect the debtor book.
5. Submit the application and respond to provider questions on customers and trading history.
6. Finalise facility terms and begin submitting eligible invoices for funding.

If your business is affected by extended payment terms

Waiting 30, 60 or 90 days to be paid can create a working-capital gap even when the underlying business is performing well. Invoice finance provides one way to bring some of that cash forward by accessing funding against eligible receivables.

3LANE Finance can assess your aged debtor report, customer payment terms and existing security, then compare suitable provider structures and total costs. Learn more about our debtor and invoice finance service.

Learn more about our debtor and invoice finance service

Talk to 3LANE Finance about your debtor book and working-capital needs.

Important information: This article provides general information only and does not constitute financial, legal, tax or accounting advice. Lending criteria, pricing and availability vary between lenders and are subject to assessment and approval.