Invoice Finance and Debtor Finance: A Practical Guide
ADS Team
Author
August 8, 2026
about 1 month ago
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In short: Invoice finance advances a percentage of your unpaid invoices - commonly 80% - and releases the balance, less fees, when your customer pays. It converts a receivables ledger into working capital without adding property security, which makes it one of the few options available to a fast-growing business with no assets to pledge.
Key takeaways
- Factoring means the financier collects from your customers; discounting keeps collection with you.
- Under recourse terms you repay the financier if your customer does not pay.
- The headline discount rate understates the cost - the service fee is charged on gross invoice value.
- It scales with sales, which is why it suits growth that outpaces cash.
Factoring vs discounting
| Factoring | Invoice discounting | |
|---|---|---|
| Who collects | The financier | You |
| Customer awareness | Disclosed | Usually confidential |
| Suits | Smaller businesses without a credit function | Established businesses with their own collections |
| Cost | Higher - includes collection service | Lower |
Whether your customers know is a genuine commercial consideration. In some industries it is routine; in others it signals distress.
Reading the real cost
On a $500,000 ledger at an 80% advance, 9.5% discount rate, 1.5% service fee and 45 days to payment:
- Advanced now: $400,000
- Discount charge over 45 days: $4,685
- Service fee (1.5% of gross): $7,500
- Total cost: $12,185
- Effective annual rate on the cash advanced: ~24.7%
That is the number to compare against an overdraft, not the 9.5% headline. The service fee applies to the full invoice value while you only receive the advance.
Where it fits and where it does not
Works well where debtors are creditworthy businesses, invoices are for completed work, and growth is genuinely constrained by cash rather than demand.
Works badly where invoices are progress claims subject to dispute, where a single debtor dominates the ledger, or where the underlying business is unprofitable - financing receivables faster does not fix a margin problem, it just accelerates the timeline.
Frequently asked questions
What is recourse?
Under a recourse facility you repay the financier if your customer does not pay. Non-recourse transfers that risk to the financier and costs more. Most Australian facilities are recourse.
Will my customers know?
Under factoring, yes - the financier collects directly. Confidential invoice discounting keeps the arrangement private, but usually requires a stronger business to qualify.
Can I finance only some invoices?
Selective or spot factoring exists and suits occasional needs, though the per-invoice cost is higher than a whole-ledger facility.
Related reading
- Small Business Line of Credit: How It Works and When to Use One
- Business Loan Types: A Complete Australian Guide
- Bad Credit Business Loans: What Is Actually Available
Sources
- Business finance options — business.gov.au
- Debtor and invoice finance guidance — ASBFEO
Information current as at 2 September 2026.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.
Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.
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