You’ve done the work and issued the invoice. Now you wait 45 days, or “30 days end of month”, which in practice lands closer to 60. Meanwhile wages run fortnightly, suppliers want paying on their terms, and the ATO doesn’t move its dates to suit your debtor ledger.
That gap is the most common reason profitable Australian businesses run short of cash, and it gets worse, not better, when you grow. Every new job means more labour and materials funded up front, and a bigger receivables balance sitting on the balance sheet doing nothing.
Invoice finance exists to close that gap. It has become far more mainstream in Australia over the past decade, but it is still widely misunderstood, and genuinely wrong for some businesses.
How it actually works
A provider advances you a percentage of an invoice’s face value shortly after you issue it. That percentage is the advance rate, and it typically sits between 70% and 85% depending on your industry, your debtors and the quality of your paperwork. When the customer pays, the provider releases the balance less its fees.
On a $100,000 invoice at a 75% advance rate, you’d receive $75,000 within a day or two and the remaining $25,000, less fees, when the debtor settles.
This is not a term loan. You are converting an asset you already own into cash earlier than the terms allow, and the facility grows as your sales grow. That is why it suits businesses whose cash problem is caused by expansion rather than losses.
The debtor ledger is what’s being funded
Most business lending looks first at your business. Invoice finance looks first at your customers, because they ultimately repay the advance. Expect a provider to examine:
- Debtor concentration. If one customer is 60% of your ledger, that’s a risk, and providers often cap how much of the facility a single debtor can represent.
- Credit quality. Large, reliably paying customers support a higher advance rate than a ledger of small, slow payers.
- Ageing. Invoices past 90 days usually drop out of the funded pool entirely.
- Dilution. Credit notes, rebates, retentions and disputes reduce what a debtor actually pays, so a history of adjusting invoices means more conservative funding.
- Whether the debt is clean. Work in progress and contracts with set-off rights are harder to fund. Construction progress claims can be funded, but by a narrower set of providers.
Clean purchase orders, signed dockets and accurate ageing reports do more for your advance rate than negotiating on price.
The three choices that shape your facility
Disclosed or confidential. In a disclosed facility your customers are told the invoice has been financed and pay into an account the provider controls. In a confidential facility the arrangement stays between you and the financier, and you keep collecting. Confidential costs more and demands stronger systems, because the provider is relying on you. Disclosure is unremarkable in transport, labour hire and wholesale; elsewhere it genuinely raises questions, and the extra cost is worth it.
Whole ledger or selective. A whole-ledger facility funds everything you invoice, usually on a fixed 12-month term with minimum monthly fees and a notice period to exit. A selective facility funds individual invoices as needed, and you pay only when you draw. Selective is dearer per dollar but cheaper overall if you only need it in the lumpy months.
Recourse or non-recourse. Under recourse, if your customer doesn’t pay, you repay the advance, usually by offset against the rest of the ledger. Under non-recourse the provider carries approved bad debt risk, at a higher cost and with insurer-set limits per debtor. Most Australian facilities are recourse, and non-recourse is not blanket protection, so read what is covered.
What it costs, in structure terms
Nobody can quote a rate without seeing your ledger, and you should be sceptical of anyone who tries. What you can do is understand the components, so you can compare offers properly.
Expect some combination of a discount or interest charge on funds actually drawn, priced off a benchmark rate plus a margin; a service fee set as a percentage of invoice value, covering ledger management and collections; and sometimes a line fee on the limit whether you use it or not. Establishment fees, periodic audit fees and early termination costs sit on top.
The margin reflects perceived risk. A labour hire business invoicing large corporates for completed hours is a simpler proposition than a subcontractor invoicing progress claims with retentions attached. Judge the result against your realistic alternative, not against a secured overdraft you can’t actually obtain.
Who it suits, and who it doesn’t
It works well for businesses selling business to business, on credit terms, to a spread of creditworthy debtors, whose growth is outrunning their cash. Transport, labour hire, wholesale, manufacturing and recruitment fit that shape, as do asset-light firms that can’t raise much against property or equipment.
It is the wrong answer if you sell to consumers or take payment at the point of sale, because there is no receivable to fund, or if your terms are short and customers pay promptly. It is a poor fit if one or two customers dominate your ledger, or if your invoices routinely attract disputes. And it is the wrong tool for an unprofitable business: invoice finance accelerates cash, it does not create margin.
A sensible first step
Pull an aged receivables report and work out your true average days to collect. Then ask what you would do with that money if it arrived four weeks earlier. If the answer is worth more than the fee, the conversation is worth having.
For an honest read on whether your ledger would fund well and which structure suits it, talk to Flexible Capital. They arrange facilities from $100,000 to $20 million, and will say plainly if it isn’t the right tool for you.
