Proposals · Glossary

What is invoice factoring?

Invoice factoring is selling your unpaid invoices to a finance company, called a factor, for cash before your customers pay. The factor advances most of the invoice value straight away, collects the full amount from the customer, then pays you the balance minus its fees. It turns money owed in 30 days into money in the bank this week.

Factoring is one of the oldest forms of business finance and one of the most misunderstood. It is not a loan against the business; it is a sale of specific debts, with costs and conditions that suit some businesses and badly hurt others.

Indunil Asanka · Co-founder

4 min read · Published 21 October 2026

Factoring, invoice discounting and an overdraft compared
	Factoring	Invoice discounting	Business overdraft
What is financed	Specific invoices, sold to the factor	The invoice ledger, used as security	The business as a whole
Who collects from customers	Usually the factor	You do, as normal	You do, as normal
Do customers know	Yes, they pay the factor	Usually not	No
How the cost is charged	A fee plus a discount on the advance	Interest on the amount drawn plus fees	Interest on the balance used
Suits	Fast growing firms with slow paying business customers	Established firms with good credit control	Short gaps across the whole business

How factoring works, step by step

You issue an invoice to a business customer as usual and assign it to the factor. The factor checks that the customer is creditworthy and the work is complete, then advances an agreed share of the invoice, often within a day or two. The customer is told to pay the factor instead of you. When the customer pays, the factor sends you the remaining balance after taking its fee. In a fictional example, a $10,000 invoice with an 80 percent advance pays $8,000 now; if the customer pays in 30 days and the fees come to $300, the last $1,700 follows.

Recourse and non-recourse

Under recourse factoring, if the customer does not pay, you must buy the invoice back or repay the advance, so the bad debt risk stays with you. Under non-recourse factoring, the factor takes the risk of the customer failing to pay for credit reasons, and charges more for it. Read what non-recourse actually covers, because disputes about the quality of the work usually fall back on the seller under either kind.

The legal side in Australia

Under the Personal Property Securities Act 2009, a transfer of an account, which includes an unpaid invoice, is treated as a security interest. Factors therefore register their interest on the Personal Property Securities Register so that it ranks ahead of later claims. If your business already has a lender with a general security over all its assets, that lender may need to agree before you can factor invoices. Check your existing loan terms before signing.

When it helps and when it does not

Factoring helps a business that is profitable but short of cash because its customers are large and slow, such as a labour hire or transport firm paid on 45 day terms while paying wages weekly. It suits poorly a business whose customers are consumers, whose invoices are often disputed, or whose margins are thin, because the fees come straight out of profit. Business.gov.au's cash flow guidance lists faster collection first: invoice promptly, update payment terms and make paying easy, which costs far less than selling the debt.

Where it shows up in the product

The proposals module does not factor or finance invoices, and it does not hold the money: card payments through an invoice pay link go to the owner's connected Stripe account through Stripe Checkout, on paid plans. What it offers is the cheaper end of the same problem, deposits taken at acceptance, a due date on every invoice, an overdue status the day after it, and reminder presets that chase without you writing each email.

Questions people ask

Is invoice factoring a loan?

Not in the usual sense. You sell specific invoices and the factor's repayment comes from your customer, not from you, so it often does not appear as debt in the way a loan does. Under recourse factoring, though, you still owe the money back if the customer does not pay, so in practice the risk can look a lot like a loan.

How much does invoice factoring cost?

Factors usually charge a service fee based on the invoice value plus a discount charge on the money advanced for the time it is outstanding, and some add setup, minimum volume or termination fees. Ask for the total cost on a sample invoice paid at 30, 60 and 90 days, because the headline rate rarely shows the whole price.

Will my customers know I use factoring?

With factoring, yes. The customer is told to pay the factor, and the factor often handles reminders and collection. Some businesses worry this signals cash trouble; in industries where factoring is common, customers are used to it. If you would rather keep the arrangement invisible, invoice discounting usually leaves collection with you.

Can sole traders factor their invoices?

Some factors work with sole traders and small businesses, but most want business customers with a credit history they can check, a minimum monthly invoice volume and invoices for completed work. Invoices to consumers, progress claims in some construction contracts and invoices already subject to set off are usually excluded.

Can I factor only one invoice?

Yes. Some providers offer single invoice or spot factoring, where you choose individual invoices instead of handing over the whole ledger. It costs more per invoice but avoids long contracts and minimum volumes, which suits a business with one large, slow customer rather than a steady stream of credit sales.

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Sources

Written and checked by the OneCraft team. Last checked 21 October 2026.