Quick answer
Factoring is when a business sells its unpaid invoices to a finance company, called a factor, in return for most of their value straight away. The factor then collects payment from your customers and pays you the balance, less its fees, once they settle. It turns 30, 60 or 90-day invoices into cash within days, and your customers usually know the factor is involved.
Key points
- You sell invoices rather than borrow against them
- Most of the invoice value is advanced upfront; the rest, less fees, arrives when your customer pays
- The factor usually manages collections, so customers deal with it directly
- Approval leans on your customers' creditworthiness more than your own
You’ve done the work and sent the invoice, but the customer’s terms say 60 days. Meanwhile wages, BAS and suppliers all want paying this month. Factoring closes that gap by letting someone else wait for the money instead of you.
How factoring differs from a loan
The word comes from a very old trade practice, and the core idea hasn’t changed. You aren’t borrowing against your invoices; you’re selling them. The government’s business.gov.au glossary puts it in similar terms: a factor pays a discounted price for the receivables, then becomes the one who follows up the debtors.
That shift from borrowing to selling explains most of factoring’s features. The factor cares more about whether your customers pay reliably than about your balance sheet. Your customers pay the factor, not you. And the facility grows naturally as your sales grow, because every new invoice is something else the factor can buy.
Where the money goes, step by step
- The job is finished and the invoice goes out, carrying a notice to pay the factor.
- Most of that invoice’s face value lands in your account quickly, commonly within 48 hours.
- Your customer pays the factor on their normal terms.
- The factor sends you the remaining balance, minus its fees.
Fees are usually a mix of a service fee (often calculated on the volume you put through) plus a time-based charge for how long the advance is outstanding. Some facilities add setup fees or minimum monthly charges. Ask for the total cost on a typical month of invoices in dollars, which is the only fair way to compare factors. Our invoice finance calculator helps with that.
What a factor checks
Expect questions about your aged receivables, who your customers are and how promptly they’ve paid in the past. Factors set a concentration limit so one large customer can’t make up too much of the funded ledger. They’ll also search the PPSR: where an existing lender’s general security agreement already captures your receivables, it will need to release them or agree to the factor ranking first. If you’d rather talk the details through, send us a quick enquiry.
Worked example: a labour hire firm on 60-day terms
An Adelaide labour hire business invoices $200k a month to construction clients who pay in about 60 days, while its workers are paid weekly.
| Figure | |
|---|---|
| Invoices sold this month | $200k |
| Advance at 80% | $160k within days |
| Customers pay the factor (around day 55) | $200k |
| Factor’s fees for the month (example) | $5,000 |
| Balance paid to the business | $35k |
For $5,000 in fees, the business has $160k to cover payroll weeks earlier than it otherwise would, without taking on a term loan. Whether that’s good value depends on the margins in the work; if a job only clears a thin profit, the fees deserve a hard look.
Factoring, discounting and other relatives
Invoice discounting is the confidential cousin: you borrow against the ledger and keep collecting yourself. Debtor finance is the umbrella term lenders often use for both. For the legal side of handing over your invoices, see assignment of debts. Our comparison of invoice factoring vs invoice discounting sets the two side by side.
Waiting on customers to pay?
If slow payers are squeezing your cash flow, invoice factoring is one answer, and sometimes a line of credit or a property-backed facility is a better one. Sixty seconds on our form gets the ball rolling. Tell us what you invoice each month, typical terms and who your main customers are. There’s no credit file check involved in sending it. Your details won’t be handed to a stack of funders, and a person who understands receivables finance will phone you. Accurate monthly figures help us match the right facility straight away.
Frequently asked questions
What's the difference between factoring and invoice discounting?
With factoring, the finance company typically runs collections and your customers are told to pay it. With invoice discounting, you keep collecting and the arrangement is usually confidential. Discounting tends to suit larger businesses with solid credit control; factoring suits those who'd welcome help chasing payments.
What is recourse and non-recourse factoring?
Under recourse factoring, if a customer doesn't pay, the debt comes back to you and you repay the advance. Under non-recourse factoring, the factor carries some or all of that credit risk, usually for a higher fee and only for customers it has approved.
Will my customers know I'm factoring?
Usually, yes. Invoices carry a notice telling customers to pay the factor's account. Many businesses find customers are used to this, but it's worth telling key clients yourself before the first notice arrives.
Can a new business use factoring?
Often more easily than a loan. Because the factor relies heavily on your customers paying, a young business invoicing established, creditworthy customers can sometimes qualify where a bank wouldn't lend on the trading history alone.
Does factoring show up on the PPSR?
Typically, yes. The factor generally registers its interest in your receivables on the Personal Property Securities Register. If your bank already holds a general security agreement over the business, that will need to be dealt with before the factor can proceed.