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Recruitment, transport, manufacturing, construction subcontracting and professional services firms often use invoice finance to close the gap between doing the work and getting paid.
Invoice finance lets a business access cash tied up in unpaid invoices instead of waiting 30 to 60 days or more for customers to pay. Businesses that pay wages and suppliers upfront but invoice on credit terms use it most, including recruitment and labour hire, transport, manufacturing and wholesale, construction subcontracting and professional services.
Invoice finance is one of the most practical funding tools available to businesses that issue invoices and wait to get paid.
Rather than taking on a traditional loan, a business uses its outstanding invoices as the collateral for accessing funds, receiving a portion of the invoice value upfront and settling the remainder when the customer pays.
It is a product that suits certain types of businesses particularly well. These five types of business use it most, and each has its own reason for doing so.
How invoice finance works
The process follows the same basic steps with most providers:
- You complete the work and issue an invoice to your business customer.
- The finance provider advances a percentage of the invoice value, commonly somewhere around 70% to 90%.
- Your customer pays the invoice on its normal terms.
- The provider pays you the remaining balance, less its fees.
There are two main structures. With invoice factoring, the provider usually manages collections and your customers know you’re using finance. With invoice discounting, you keep control of collections and the arrangement is often confidential. In Australia, both are often grouped under the term debtor finance.
| Invoice factoring | Invoice discounting | |
|---|---|---|
| Who collects from customers | The finance provider | Your business |
| Do customers know | Usually yes | Often confidential |
| Typical fit | Smaller businesses wanting help with collections | Larger businesses with established credit control |
| Facility type | Selected invoices or whole ledger | Usually whole ledger |
1. Recruitment and labour hire businesses
Recruitment agencies and labour hire firms face a structural cash flow challenge that makes invoice finance a natural fit. They pay their workers weekly or fortnightly but invoice client businesses on 30 or 60-day terms.
The gap between meeting payroll and receiving payment from clients can put significant pressure on cash reserves, particularly as a business grows and the number of workers on placement increases. Invoice finance allows these businesses to access the value of outstanding invoices as soon as they are raised, keeping payroll covered regardless of when clients settle.
A facility tied to the sales ledger also grows with the business. Each new placement creates new invoices, which increases the funding available without a fresh loan application.
2. Transport and logistics operators
Transport companies will often carry high ongoing costs in fuel, maintenance, insurance and driver wages that fall due regardless of when their clients pay. Many operate on tight margins with large business customers who take extended payment terms as standard.
Invoice finance gives transport operators access to cash tied up in unpaid freight invoices, allowing them to keep vehicles on the road and meet operating costs without waiting on slow-paying clients. Rising fuel costs make this gap wider, because more cash goes out each week while the payment terms stay the same. Operators expanding their fleet often pair invoice finance with equipment finance for trucks and trailers.
3. Manufacturing and wholesale businesses
Manufacturers and wholesalers often carry high upfront costs in raw materials, production and inventory before an order is completed and invoiced. When customers then take 30 to 60 days to pay, the gap between expenditure and receipt can stretch working capital considerably.
Invoice finance provides a way to access cash from completed orders while production continues, reducing the need to turn down new business because the last job has not yet been paid for. Seasonal manufacturers and wholesalers can find it useful in the build-up to peak periods. Our article on smart finance strategies for seasonal businesses covers this in more detail.
4. Construction subcontractors
Subcontractors in the construction industry are frequently required to complete work and submit progress claims before payment is received, often with delays imposed by head contractors or progress claim assessment periods. The combination of upfront material and labour costs, slow payment terms and retentions held back until project completion creates ongoing cash flow tension.
Invoice finance can help subcontractors bridge these gaps and take on additional projects without being constrained by the timing of payments from above.
Construction is a specialised area for invoice finance. Progress claims can be disputed, varied or offset against other amounts, so not every provider funds them, and those that do may advance a lower percentage. Look for a provider with construction experience, and check how it treats retentions and disputed claims before you sign.
5. Professional services firms
Accounting firms, IT consultancies, marketing agencies and other professional service businesses often invoice large corporate or government clients on extended terms. While the business itself may have relatively low fixed costs compared to trade businesses, the volume of outstanding invoices at any one time can be substantial.
Invoice finance allows these firms to smooth out the uneven timing of receipts without taking on debt that sits on the balance sheet in the traditional sense. Firms that bill on project milestones can draw funds as each invoice is issued rather than waiting on large, irregular payments.
What to check before you sign up
Invoice finance suits businesses with a steady flow of invoices to creditworthy business customers. Before choosing a facility, check:
- the advance rate and how it changes for different customers
- all fees, including discount fees, service fees, minimum monthly charges and exit fees
- whether you must finance your whole ledger or can choose individual invoices
- the contract term and notice period
- what happens if a customer doesn’t pay, including whether the facility is recourse or non-recourse
The hidden cost of slow payers is often larger than businesses realise. Our article on the hidden cost of late payments puts numbers to it, and cash flow mistakes growing businesses make shows where invoice finance can and can’t help. For risk controls, read mitigating risks in debtor finance. For quick wins that don’t need finance, see 4 ways to strengthen your business cash flow.
Compare invoice finance options
If your business issues invoices and experiences cash flow gaps while waiting to be paid, a finance broker can help you compare your options across a range of invoice finance products. Other cash flow finance options, such as a business line of credit, may suit businesses with less predictable invoicing. Attain Loans is a business finance broker in Melbourne’s west that compares working capital options across a panel of lenders, subject to each lender’s assessment.
This article is general information only and doesn’t take into account your objectives, financial situation or needs. Consider whether it’s appropriate for you and speak with a licensed professional before making a decision.
Further questions
What is invoice finance?
What is the difference between invoice factoring and invoice discounting?
How much of an invoice can you borrow against?
How much does invoice finance cost?
Can a small business use invoice finance?
This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.
