Debtor finance vs a business loan: a facility that breathes, or a lump sum that ends

Before comparing products, look at the shape of the problem. Some cash needs come back every month: wages go out weekly, customers pay in 45 days, and the gap between the two reopens with every pay run. Others happen once: a new machine, a fit-out, a tax bill. Debtor finance was built for the first shape. A business loan was built for the second. Most of the mistakes we see come from using one to fix the other.

How does each one work?

Debtor finance is a facility secured by the money your business customers owe you. You upload or sync invoices; the financier advances a share of the eligible ones, commonly 70% to 85%, and collects or receives payment when customers pay. Because new invoices keep arriving, the facility revolves: available funds expand in a busy month and shrink in a quiet one. It can run as disclosed factoring or confidential discounting; our factoring vs discounting page explains the difference.

A business loan is a fixed amount, paid out once and repaid in set instalments over an agreed term, from a few months to several years. It can be unsecured, secured over equipment, or secured over property. When the last repayment is made, it’s finished. More detail is on our business term loans page.

Side by side

	Debtor finance	Business loan
Shape	Revolving, rises and falls with sales	Lump sum, repaid down to zero
What it’s sized on	Eligible unpaid invoices	Cash flow, financials, security
Best for	Recurring working capital gaps	One-off purchases and projects
Who it suits	B2B firms selling on credit terms	Almost any trading business
Security	Receivables, often with a general security agreement	Unsecured, assets or property
Repaid by	Your customers paying their invoices	Your scheduled instalments
How it ends	Notice period, often a minimum term and exit fee	Final repayment, or early payout
Ongoing admin	Invoice uploads, reconciliations, audits	Mostly none
Costs	Service fee on invoices, charge on funds drawn, minimums	Interest on the balance, establishment and other fees

The eligibility gap: why the headline number shrinks

A debtor finance offer might say “up to 80%”, but that applies only to invoices the financier is prepared to count. Expect it to leave out invoices past about 90 days, debts owed by related companies, customers who are also your suppliers, progress claims on unfinished work and disputed amounts. It will also apply a concentration limit, which limits the share of your funding that any single customer can account for. If 60% of your ledger is owed by a single head contractor, a chunk of it may be ignored.

A loan has no such moving parts. Once approved, the amount is the amount. That certainty is useful when you need a precise sum on a precise date.

The PPSR clash to check before you apply

Here’s a practical snag that catches owners off guard. Debtor financiers register their security over your receivables on the Personal Property Securities Register, which has a specific “account” category for unpaid invoices. Many business lenders, including some unsecured online lenders, take a blanket registration covering all business property, current and future, and that blanket already catches those receivables.

If an earlier registration is sitting there, the debtor financier will want it released or subordinated before funding. That means asking your existing lender to sign a priority deed. Some do so readily; some take weeks; some refuse. Look your business up on the PPSR (or have your accountant do it) before applying; the general security agreement entry in our glossary has the background. If you’ve already stacked several online loans, our guide on existing online loans covers how to tidy them up first.

When does debtor finance win?

• The gap recurs. Labour-heavy businesses such as cleaning, security, labour hire and transport pay people weekly and get paid monthly or slower.
• Sales are growing. Every new contract adds invoices, which adds funding, without a fresh application.
• There’s no property, or you’d rather not use it. The security is the ledger.
• Your customers are stronger than your balance sheet. A young business billing a hospital, a council or a large builder can borrow on their creditworthiness.
• You want help collecting. A disclosed facility brings a credit control team with it.

When does a business loan win?

• The need happens once. A truck, a commercial kitchen, a refurbishment, a partner buyout or a single tax bill.
• You sell to consumers or get paid on the spot. No invoices, no debtor finance.
• You want an end date. A loan finishes when it’s repaid, with no ongoing reporting.
• The amount is fixed and known. A loan delivers exactly that sum on settlement day.
• You’d struggle with the admin. Loans don’t need weekly uploads or monthly reconciliations.

Where the purchase is machinery or vehicles, equipment finance using the item as security frequently beats both on price.

Need a hand working out which shape your cash problem is? Tell us about it here. The form is a sixty-second job, and your credit report stays out of it.

Using both: an illustrative example

A commercial cleaning contractor wins a three-year hospital contract worth $1.1m a year. It needs $70k for floor machines and a van, and must pay 25 extra staff weekly while the hospital pays monthly in arrears on 30-day terms.

• The equipment is a one-off purchase with a long useful life. A five-year equipment loan or chattel mortgage matches the asset and keeps the monthly cost steady.
• The wages gap recurs every month for three years. At roughly $90k of contract billing a month, the contractor can be waiting six to eight weeks for each payment. Debtor finance advances most of each invoice as it’s raised, so wages are covered and the facility grows if the contract expands.

Using a single loan for everything would have meant borrowing a large lump to cover the wages gap, paying interest on all of it from day one, and needing another loan when the next contract arrived. Using debtor finance for the machines would have been impossible, because there’s nothing to invoice until the machines are working. More splits like this are covered in what to do when you win a big contract.

Costs, contracts and the exit

• Debtor finance: a service fee on invoices processed, a charge on the money drawn, and often a minimum monthly fee. Look closely at the minimum term, the notice period and any termination fee, because leaving early can be costly.
• Business loan: an establishment fee, interest on the balance and sometimes an early repayment fee. Total it up before signing using the business loan repayment calculator.

Standard form small business loan contracts entered into or renewed since November 2016 fall under unfair contract terms laws that ASIC polices, and its REP 565 report looked at how the big four banks changed their terms in response. Useful protection, but no replacement for reading what you sign. Model the debtor finance side with the invoice finance calculator.

Decision checklist

1. Is this need recurring or one-off?
2. Are your customers businesses that you bill on terms, and how promptly do they settle?
3. How much of your ledger is eligible, and does one customer dominate it?
4. Does an existing lender hold a general security interest on the PPSR?
5. What are the minimum term, minimum fees and exit costs on the debtor finance offer?
6. Over the months you’ll actually use it, how many dollars does each choice cost in all?

Match your cash problem to the right tool

Most owners don’t need a lecture on product types; they need someone to look at their invoices, their contracts and what they’re trying to pay for, and then say which tool fits. That’s the job we do. Our enquiry form asks for just the essentials and is done in around a minute, and submitting it won’t register as a credit enquiry anywhere. You won’t be handed on to a queue of financiers either: a lending specialist on our team goes through your details and calls you personally. Include your monthly invoicing, your customers’ payment terms and anything you’re buying outright, so we can structure it properly at the first attempt.

Work out the right structure with us →