Invoice factoring: selling your invoices for cash now, with collections handled

The first time a customer receives an invoice from you with a line saying “please pay to” a company they’ve never heard of, someone in their accounts team will probably ring to ask why. That small moment is what separates invoice factoring from most other business finance. You get cash against invoices quickly, and in exchange a third party steps into the relationship between you and the people who pay you.

For plenty of businesses that trade-off is well worth it. This page covers how factoring works in practice, the recourse question every owner should understand before signing, what it costs and who it suits.

What actually happens when you factor an invoice?

The mechanics are simple:

1. You deliver goods or complete work and raise an invoice as normal.
2. The invoice carries a notice of assignment telling the customer to pay the factor’s account.
3. The factor checks the invoice (sometimes with a quick call to the customer) and advances most of its value to you, often within a day.
4. The factor follows up payment on the due date, sending reminders and calling if needed.
5. When the customer pays, the factor deducts the advance and its fees and pays you the remaining balance.

You can factor your whole ledger under an ongoing facility, which is a form of debtor finance, or pick individual invoices one at a time. The second option, often called spot or selective factoring, costs more per invoice but avoids long contracts.

Recourse or non-recourse: who wears a bad debt?

Of all the terms in a factoring contract, this one deserves the most attention, and it’s often misunderstood.

With recourse (the norm in Australia): if your customer hasn’t paid by the end of the recourse period, commonly about 90 days from invoice date, you either repay the advance or replace the invoice with a fresh one. The factor is funding and collecting, but the credit risk stays with you. If a big customer goes into administration, your business carries the loss.

Non-recourse: the factor (usually backed by trade credit insurance) absorbs the loss if an approved customer becomes insolvent. Read the definition carefully. Non-recourse cover generally applies only to insolvency of customers the factor has approved, up to a credit limit for each one. It typically won’t cover a customer refusing to pay because of a dispute about your work.

Non-recourse costs more and is harder to get, but for a business with a few large customers it can be worth comparing. A single insolvency can wipe out years of margin.

Which businesses suit invoice factoring?

Factoring works best when the business sells to other businesses, invoices are for completed work, and the owner would rather not spend Friday afternoons chasing payments. Typical users include:

• Transport and logistics operators carrying freight for larger shippers on 30 to 60 day terms. See how lenders view freight and logistics businesses.
• Recruitment and labour-hire firms that pay workers weekly but bill clients monthly.
• Wholesalers and manufacturers supplying retailers or other manufacturers.
• Newer businesses that have landed good customers but have little trading history, since the factor relies mostly on the customers’ ability to pay.

It’s a weaker fit for businesses billing consumers, construction firms invoicing progress claims (these are usually ineligible), and anyone whose customers regularly dispute invoices.

What does a factor look at?

What’s assessed	Why it matters to a factor
Customer quality and spread	The factor is relying on your customers paying it
Proof of delivery	Signed delivery dockets or timesheets make invoices hard to dispute
Payment history	How many days your customers actually take, not your stated terms
Disputes and credit notes	Frequent adjustments reduce what the factor will fund
Your contracts with customers	Clauses restricting assignment, set-off rights or long payment terms
Tax and existing security	ATO debt and an existing lender’s security over receivables both need resolving

On the contracts point: some large customers’ standard terms include a no-assignment clause or very long payment terms. Penalties for using unfair terms in standard small business contracts have applied since November 2023, and ASIC publishes guidance on what’s covered. If a customer’s terms look one-sided, it’s worth raising with an adviser, but in practice most factors know which major buyers accept assignment notices.

Already thinking about your own numbers? Send us a brief outline; a specialist reviews your invoicing picture, and no credit file is pulled while you’re only asking.

What does factoring cost?

There’s no single price, and this directory never quotes rates. The costs you’ll typically see:

• A factoring or service fee, usually a percentage of the invoice value, which pays for the collection work as well as the funding.
• A discount charge on the cash advanced, which keeps running until the customer pays.
• Set-up costs, such as documents and PPSR registration.
• Possible extras: minimum monthly volumes, fees for invoices passing the recourse date, credit insurance (for non-recourse) and exit fees.

Because the factor runs collections, the service fee is normally higher than for confidential invoice discounting. Whether that’s good value depends on what credit control would cost you otherwise. A part-time bookkeeper chasing debts two days a week has a real cost, and factoring can replace some of it.

Here’s an illustrative example. A courier business invoices $120k a month to six corporate customers on 30-day terms that in practice stretch to about 50 days. Under a whole-ledger factoring facility advancing 80%, it might draw about $96k soon after invoicing each month. If the total of service fees and discount charges came to, say, $2,600 a month, it would be paying that amount to turn a 50-day wait into roughly a one-day wait and to hand over collections. Whether $2,600 is good value depends on the margin it earns on that freight and what else it could fund. Our invoice finance calculator helps you model your own figures.

How to tell customers you’re factoring

A short heads-up prevents most awkward calls:

• Contact your main customers’ accounts payable teams before the first factored invoice arrives.
• Explain it plainly: you’ve arranged a funding facility to support growth and their payment details are changing.
• Confirm the new bank details through a channel they trust, since changed bank details are a common fraud trigger and careful customers will want to verify.
• Ask the factor to agree how it will handle reminders, so its approach matches the way you deal with customers.

Pros and cons of invoice factoring

Advantages: fast cash against work already done, funding that grows with sales, someone else chasing payments, and approval based largely on customer strength.

Drawbacks: customers know about the arrangement, total fees are higher than confidential options, recourse means bad debts still land with you, and some contracts carry minimum volumes or lock-in periods.

What are the alternatives?

If you have strong credit control and want confidentiality, invoice discounting may be cheaper. Our factoring vs discounting comparison covers the differences. If the gap is occasional rather than constant, a business line of credit or business overdraft can be simpler. For a deeper look at the philosophy behind each approach, read selling invoices vs borrowing against them.

Factoring providers profiled in our directory include Earlypay, Bibby Financial Services and Fifo Capital.

Ready to stop waiting on your customers?

If you’re tired of being your customers’ unofficial bank, factoring can get you paid in a day and take collections off your plate. Getting the structure right matters more than the headline price: recourse terms, minimums and exit fees decide whether it works.

Describe your invoicing to us and we’ll look for the right factor. The questions take around sixty seconds, and your credit rating is left completely alone at the enquiry stage. Your enquiry isn’t auctioned to a queue of funders, so your mobile stays quiet; instead, one of our team works through it and gives you a call. Give precise figures for monthly billings, customer names and agreed terms, and the facility we put forward should suit from day one.

See what factoring could look like for you →