Quick answer
Invoice factoring is when a business sells or assigns its unpaid invoices to a factor, who advances most of the value immediately and collects payment from the customer. The balance, less fees, follows. Ownright Custom Finance arranges invoice factoring Australia-wide, helping businesses compare it with other invoice and cash flow options.
Key points
- The factor advances cash and collects from your customer
- Customers usually know, as they pay the factor
- Often accessible to newer or smaller businesses with sound invoices
- Can include credit control support, saving admin time
- Suits
- Small to mid-size businesses invoicing other businesses on credit terms
- Security
- The invoices, sometimes with wider security
- Structures
- Recourse or non-recourse, disclosed
- Australia-wide
- Yes
What is invoice factoring?
Invoice factoring is a way of turning unpaid invoices into cash by assigning them to a specialist provider known as a factor. The factor pays you most of the invoice value soon after you issue it, then collects the full amount from your customer. When the customer pays, the factor sends you the remainder, minus its charges.
It is one of the oldest forms of business funding, and it remains popular because it solves a common problem: you have done the work, but cash is not in the bank. For growing businesses, this can mean the difference between taking on a new customer and turning them away.
How does invoice factoring work?
- You deliver goods or services and issue an invoice.
- You assign the invoice to the factor.
- The factor advances a large portion of its value.
- Your customer pays the factor, usually into a nominated account.
- The factor releases the balance, less fees.
Because the factor collects, your customers need to know. That is the main practical difference compared to a confidential debtor finance facility, which we explain on our debtor finance page.
Who uses invoice factoring?
- Start-ups and young businesses with strong customers but little trading history
- Labour hire, cleaning and security providers with weekly wage commitments
- Transport companies awaiting freight payments
- Subcontractors in building and civil work
- Manufacturers supplying larger businesses on extended terms
- Businesses that want help with credit control and collections
Factoring versus other invoice funding
| Feature | Factoring | Debtor finance (confidential) | Selective finance |
|---|---|---|---|
| Customers told | Yes | No | Varies |
| Collections | Factor | You | Varies |
| Commitment | Often ongoing | Ongoing | Per invoice |
| Admin burden | Lower | Higher | Moderate |
| Typical suitability | Smaller and growing firms | Established firms with strong processes | Occasional needs |
See selective invoice finance for per-invoice funding and the general invoice finance page for a wider overview.
What does a factor look at?
Your customers. Their credit quality, payment history and whether they are comfortable paying a third party.
Your invoices. Are they genuine, undisputed and for completed work?
Your business. What you sell, margins, trading history and any other lenders with security over your assets.
Concentration. If one customer represents most of your sales, the factor will weigh that heavily.
Security. Factors take an interest in the invoices and register it on the Personal Property Securities Register. If another lender already holds a general security agreement, the two may need to be coordinated. Our guide on general security agreements explains why.
How Ownright approaches invoice factoring
Trevor Scott’s long career has shown him that cash flow trouble rarely arrives politely. It comes when a big customer pays late, a new contract demands upfront costs, or a tax payment falls due. We look at the shape of the problem, not only the label. Sometimes factoring is the answer. Sometimes a cash flow loan or other structure serves better. Factoring can also be a stepping stone for new businesses; see start-up business loans for other early-stage options.
We work Australia-wide and seek out providers that fit your industry and customers. If your ledger is messy or you have a tax debt, we ask about it openly and look for providers who work with that. If customers are the issue rather than your own cash, our late paying customers finance page may also help.
An illustration
Illustrative scenario only. A young trades-supply business has won a contract with a large builder, but payment is due sixty days after delivery. The owner has no trading history to show a bank. A broker could arrange factoring so each delivery’s invoice releases cash quickly, with the factor handling reminders and the builder’s accounts team paying into a nominated account.
Mistakes to avoid
- Factoring invoices that may later be disputed
- Not telling customers in advance and causing confusion
- Overlooking an existing lender’s security over your receivables
- Ignoring minimum volume or lock-in terms
- Treating factoring as a permanent fix for an unprofitable contract
Documents to have ready
- Sample invoices and customer details
- Aged debtors report
- Recent BAS, financial statements and bank statements
- Details of any existing lender security
- Photo ID for owners and directors
Our guide on what a line of credit, overdraft and term loan are helps compare factoring with other options, and what documents you need for a loan covers the paperwork.
What does a good factor do beyond funding?
The best factors act as an extension of your accounts team. They check the creditworthiness of new customers before you commit to a sale, send reminders, reconcile payments and report on the state of the ledger. For a small business without a dedicated credit controller, that support can be as valuable as the cash. The flip side is that the factor becomes the voice of your business when it contacts customers, so tone and professionalism matter. Ask how they handle disputes and late payers, and if possible, speak to an existing client.
What are the fees made of?
Factoring charges commonly combine a service fee, calculated on invoice value or turnover, with a charge on the funds advanced while the invoice is outstanding. Some providers add set-up, minimum volume or exit fees. A cheaper-looking offer can end up costing more if it has hidden minimums or a long lock-in. We do not publish fee figures, as they depend on your customers, volumes and history. We ask providers for a written schedule so you can compare offers fairly.
How do I know if factoring is right for me?
A rough test: do you invoice other businesses on credit terms, are those invoices usually paid in full, and would having cash several weeks earlier change what you can do? If yes, factoring may be worth a closer look. If you sell mostly to consumers, work on thin margins that cannot absorb the finance cost, or want your customers kept entirely out of it, another route may be better.
Want your invoices paid sooner?
Sounds like you’re looking for invoice factoring. We’re the lending experts in matching businesses to the right factor, so see if you qualify and tell us about your customers.
How it works, step by step
- 1
Step 1
Share your customer list, typical invoices and payment terms.
- 2
Step 2
We check if factoring, debtor finance or selective funding fits best.
- 3
Step 3
We approach factors who work with your industry and customer type.
- 4
Step 4
Invoices are assigned, cash is advanced and the factor collects.
Frequently asked questions
What is the difference between invoice factoring and invoice discounting?
In factoring the provider usually collects from your customers and your customers know. In invoice discounting you generally keep collecting and your customers may not know. The funding concept is similar. Names are sometimes used loosely in Australia, so we check what the facility actually involves.
Will my customers know I use a factor?
Usually yes, because they are asked to pay the factor. For many businesses this is not a problem, especially if the factor presents itself professionally. For others, relationships are sensitive. If confidentiality matters to you, we can look at other invoice finance options.
Does the factor chase unpaid invoices?
Yes. Collections are a core part of factoring. A good factor follows up politely and consistently, which can free you from chasing. If you value your own relationships, ask how the factor communicates with customers before you sign.
What is recourse factoring?
In recourse factoring you remain responsible if a customer fails to pay, so you may need to repay the advance or replace the invoice. Non-recourse factoring shifts some of that risk to the factor, but it is less common and often costs more. We explain which is on offer.
Can a new business use invoice factoring?
Often more easily than a bank loan, as the focus is on the quality of your customers and invoices rather than your trading history. Some factors do want a minimum track record or turnover. We can approach those comfortable with younger businesses.
What does factoring cost?
Charges are generally made up of fees and a cost on the funds used, and they depend on your circumstances, customers and volumes. We do not publish figures because they differ so much. We explain every component and help you compare offers on equal terms.