The difference between Invoice Finance and Factoring

  • 19 August, 2022
  • Sharon Piening

A question I am often asked by clients is “What is the difference between Invoice Finance and Factoring”.

While both invoice a Lender advancing funds against your debtors, how they work, and their cost is quite different.

Of the two, Invoicing Finance is the most popular and is increasingly being used by businesses in Australia to support their cash flow and finance growth.

Whilst Factoring may have developed a poor reputation in its early days – this has changed, and it is a product suited to some businesses.

Key differences between Invoice Finance and Factoring

While both products involve accessing the value from invoices – what is involved, pricing and how they work is different.

The key differences between Invoice Finance and Factoring include:

Invoice Finance
You submit the invoice to the Lender
They advance up to 90% of the invoice value
You are responsible for collection of the debtors
When the customer pays, you receive the balance of the invoice
The customer is not aware of the Lenders involvement
You sell the debtor to there Lender
The Lender advances up to 95% of the invoice value
The Lender does the collection
When the customer pays, you receive the balance of the invoice
The customer is aware of the Lenders involvement

Other Pros and Cons of Invoice Finance and Factoring

Neither Invoice Finance nor Factoring require real estate security. The loans are secured by the Invoices and Directors Guarantees.

Because the amount, you receive is linked to the invoices you issue, the finance can grow in line with your business.

With Factoring a third party will be dealing with your customers.

With Invoice Finance you don’t have an external party dealing with your clients

Because with Factoring the Lender follows up collections – it costs more than Invoice Finance. On the flipside, because they do this, the time & cost for your business associated with collections is reduced.

Importantly, the Finance Application process for both facilities is far less onerous than traditional forms of finance, with a decision usually forthcoming within 48 hours.

Industries suited to Invoice Finance and Factoring

Generally, if you have a quality debtor book, robust internal invoicing and collection processes, and aren’t reliant on progress payments, either Invoice Finance or Factoring could be an option for your business.

Industries typically suited to this type of financing include:

  • Manufacturing
  • Wholesale
  • Storage
  • Recruitment – Staffing
  • Transport

If you are unsure whether your business is suited, simply get in touch.

Finance Operations and Growth

According to Xero in a recent post, small businesses in Australia experience are cash flow negative for 4.20 months each year.

The key advantage of both Invoice Finance and Factoring is that it brings forward cashflow.

This is particularly important for businesses where there is a timing mismatch between payments and collections.

Similarly growing businesses, that provide customers time to pay, often experience severe cash flow strain. This is because most sales involve sunk cost, (staff, supplies, marketing, operational expenses, etc.) that need to be met before the proceeds from a sale are received.

The faster the business grows, the more the issues compound.

By using Invoice Finance or Factoring, you can gain access to the funds usually within 24 hours of an invoice being issued. This can be a game-changer for many businesses.

What does it cost?

This is often one of the first questions we are asked. The answer is, it will depend on:

  • The quality & spread of your debtor book
  • The performance of your business
  • Your industry
  • How robust your internal processes are
  • The Lenders assessment of risk
  • The size of your facility

For a well-run business that ticks most boxes, the cost should approximate that of an unsecured overdraft – for others it can cost more.

Whilst cost is clearly important, it does need to be considered against the benefits to be gained by earlier access to cash from sales


Both Invoice and Factoring can unlock the value in a business debtor book and bring forward cashflow.

It is a flexible form of finance that can grow with your business.

A quick Google search will reveal an increasing number of providers for this form of finance. In part this is driven by business owners looking for more flexible alternatives to traditional forms of finance.

The sector is highly competitive with policies, and pricing, varying between Lenders.

If you would like to learn more, or how The 500 Group can help you access the finance you need, don’t hesitate to get in touch.

Sharon Piening

Invoice Finance Specialist

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