Invoice finance in Australia: factoring vs discounting, costs and a worked example
How invoice factoring and invoice discounting work for Australian small businesses, how the fees add up, and when debtor finance beats an overdraft.
Invoice finance lets a business borrow against unpaid invoices: the financier advances a percentage of the invoice value now, and the balance less fees when your customer pays. Invoice discounting keeps the customer relationship with you, and customers usually do not know a financier is involved. Factoring hands collection to the financier, which contacts your customers. Costs are typically a discount charge (interest on the advance) plus a service or administration fee, so the true cost depends heavily on how long your customers take to pay.
This guide is part of the small business loan rates overview. Figures are illustrative, not quotes.
Factoring vs discounting at a glance
| Feature | Invoice discounting | Factoring |
|---|---|---|
| Who collects from customers | You | The financier |
| Customer awareness | Usually confidential | Customers are notified to pay the financier |
| Typical size of business | Established, with reliable credit control | Smaller or newer businesses, or those wanting collections outsourced |
| Fees | Discount charge plus service fee | Discount charge plus higher service fee for collections |
| Selective option | Some providers allow single invoices ("spot" or selective finance) | Usually whole ledger |
| Bad debt risk | Usually stays with you (recourse) | Recourse or, at extra cost, non-recourse with credit protection |
Both are often grouped as debtor finance. The financier will register a security interest on the PPSR over your receivables, and possibly a broader GSA. If you already have a bank GSA, the bank's consent or a priority deed is usually needed. See the PPSR guide.
How the money flows
- You issue an invoice to an approved customer, say on 30-day terms.
- You submit it to the financier, which advances an agreed percentage, for example 80%.
- The customer pays, either into a controlled account (discounting) or to the financier (factoring).
- The financier releases the remaining 20%, minus its fees.
Advance rates, eligible debtors and fees are set by each provider. Invoices to related parties, invoices more than a set number of days old, progress claims and disputed invoices are commonly excluded.
Worked example: cost of financing one month of invoices
A labour hire business issues $100,000 of invoices to approved customers. Illustrative terms:
- Advance rate: 80%, so $80,000 is paid to you now
- Discount charge: 10% a year on the amount advanced
- Service fee: 0.5% of invoice value
- Customers actually pay in 45 days on average
Discount charge: $80,000 × 10% × 45 ÷ 365 = about $986 Service fee: $100,000 × 0.5% = $500 Total cost for the cycle: about $1,486
As an annual rate on the $80,000 advanced: $1,486 ÷ $80,000 × 365 ÷ 45 = about 15.1% a year. The service fee matters more than it looks: on its own it adds over 5 percentage points to the annualised cost in this example.
If customers paid in 30 days instead of 45, the discount charge would fall to about $658 and the annualised cost to about 17.6%, because the fixed service fee is spread over fewer days. Shorter cycles make percentage fees look small per invoice but expensive per year. Run your own figures through the net proceeds calculator to see how much cash arrives after fees.
When invoice finance makes sense
- You sell to other businesses or government on 30–90 day terms and growth is limited by cash tied up in debtors.
- Your customers are creditworthy even if your business is young.
- You lack property to secure an overdraft.
- You want funding that grows automatically with sales.
It suits less well when customers are consumers, invoices are frequently disputed, you bill in progress claims (common in construction), or a few customers make up most of your sales. Many financiers set concentration limits that cap how much they will advance against one debtor.
Contract terms to read carefully
| Term | Why it matters |
|---|---|
| Minimum term and notice period | Some contracts run 12 months or more with a notice period to exit |
| Minimum fees | You may pay a minimum even in quiet months |
| Recourse period | How long before an unpaid invoice is charged back to you |
| Whole-of-ledger requirement | You may have to put every invoice through the facility |
| Termination fees | Can be significant if you leave early |
| Guarantees | Director guarantees are common |
Alternatives to compare
- An overdraft or line of credit if you have security and the gap is irregular.
- Tightening your own terms: shorter payment terms, deposits, progress billing, early payment discounts.
- Supplier credit: negotiating longer terms with your suppliers.
- Trade finance or government export support for import and export cycles.
Payment times matter here. Large businesses report their payment times to small business suppliers under the Payment Times Reporting Scheme; check the scheme's official register to see how a large customer reports paying its suppliers.
Frequently asked questions
Is invoice finance a loan?
Legally it is often structured as a purchase of receivables or as a secured advance, depending on the provider. For your cash flow it behaves like short-term borrowing, and it should be compared on total cost like any other finance.
Will my customers know?
With confidential invoice discounting, usually not. With factoring, yes: they are told to pay the financier.
What happens if a customer does not pay?
Under a recourse facility the financier charges the unpaid amount back to you after the recourse period. Non-recourse or credit-protected facilities cost more and have conditions.
Is GST charged on invoice finance fees?
Financial supplies are generally input taxed, but the treatment of particular fees can differ. Check the tax invoice and ask your tax agent.
Sources
- business.gov.au — managing cash flow and payment terms
- PPSR — security interests registered over receivables
- Australian Small Business and Family Enterprise Ombudsman — late payment and small business payment terms
- ASIC — rules on misleading conduct and unfair contract terms in financial products
