Payroll runs weekly. Suppliers want thirty days. Your biggest customer pays on sixty-day terms and treats that as a starting point for negotiation. The business is profitable on paper and still cannot cover a Thursday wages run, because the money is sitting in someone else’s accounts payable queue. This is the specific problem debtor finance was built to solve, and it is a structural cash flow issue rather than a sign that anything is wrong with the business.
Short answer: Debtor finance is a facility that advances a portion of the value of your unpaid invoices, commonly around 70% to 85%, shortly after you issue them. The balance, less fees, is released when your customer pays. It converts receivables into working capital without waiting out the payment terms, and the funding line grows as your sales grow.
What is debtor finance in plain terms?
It is borrowing against money your customers already owe you. Rather than assessing your property or plant, the financier looks at your receivables ledger and advances funds against invoices you have issued. The invoices themselves are the security, which is why the facility scales with sales instead of being capped at a fixed limit.
You may see it called invoice finance, receivables finance, factoring or cash flow finance. The terminology varies between providers, but the underlying mechanism is consistent: you get most of the invoice value now instead of waiting for the customer’s payment terms to expire.
How does debtor finance work day to day?
Once the facility is set up, it runs alongside normal invoicing. You issue an invoice as usual, upload it to the financier, and receive the advance within roughly a day. When the customer settles the invoice, the remaining balance is released to you after fees are deducted. The cycle repeats continuously.
- You deliver goods or services and issue the invoice to your customer.
- The invoice is submitted to the financier, often through an automated accounting software integration.
- An agreed percentage of the invoice value, commonly 70% to 85%, is advanced to your account.
- Your customer pays the invoice on their normal terms.
- The remaining balance is released to you, less the financier’s fees.
Most providers now connect directly to Xero, MYOB or QuickBooks, which means the ledger syncs automatically and drawdowns can be near-immediate. The administrative overhead is far lower than it was a decade ago.
What is the difference between factoring and invoice discounting?
The main distinction is who manages collections and whether your customers know. With factoring, the financier takes over the collections process and customers are usually aware of the arrangement. With invoice discounting, the facility is confidential and you continue to manage your own debtor relationships.
| Feature | Invoice factoring | Invoice discounting |
|---|---|---|
| Who chases payment | The financier | You do |
| Customer awareness | Usually disclosed | Usually confidential |
| Administrative load on you | Lower | Higher |
| Typical business profile | Smaller businesses, or those without a credit control function | Established businesses with solid internal processes |
| Relative cost | Generally higher, since collections are included | Generally lower |
| Typical advance rate | Around 70% to 85% of invoice value | Around 70% to 85% of invoice value |
Indicative only. Advance rates, structures and terms differ between financiers. Confirm the specifics with your provider before entering an agreement.
What does debtor finance cost?
Pricing generally combines a discount or service fee calculated on invoice value with an interest charge on funds actually drawn. Some providers bundle these into a single rate. Cost is influenced by your turnover, the quality and spread of your debtor book, and the average time your customers take to pay.
Comparing providers requires care, because two facilities quoted differently can produce similar outcomes. Look at the total cost of funding a typical month, not the headline percentage. Ask specifically about minimum monthly fees, facility establishment costs, audit or review fees, and any charge that applies to invoices that remain unpaid past a set period.
Which businesses does debtor finance suit?
It works best for business-to-business operations that invoice on credit terms and are growing faster than their cash conversion cycle allows. Labour hire, transport, manufacturing, wholesale, professional services and recruitment appear frequently, because they carry significant costs well before the customer invoice is paid.
- You invoice other businesses or government rather than consumers.
- Your customers pay on thirty-day terms or longer.
- Wages, subcontractors or stock must be funded before you get paid.
- Growth is being constrained by cash rather than by demand.
- You have limited property or plant to offer as traditional security.
When is debtor finance the wrong answer?
It is a poor fit for consumer-facing businesses, for anyone paid at the point of sale, and for businesses where a single customer represents most of the ledger. Progress claims, retentions and work-in-progress invoicing also create complications, which is why construction can be difficult to fund this way.
The most important test is whether the underlying business is profitable. Debtor finance solves a timing mismatch. It does not fix a margin problem, and drawing against future receivables to cover ongoing losses generally deepens the difficulty rather than resolving it. If cash is tight because of pricing or cost structure, that needs addressing first.
How does it compare with an overdraft or a term loan?
An overdraft provides a fixed limit that typically requires property security and is reviewed periodically. A term loan delivers a lump sum repaid on a set schedule. Debtor finance differs in that the available funding moves with your sales ledger, so the limit expands as you invoice more.
For a business growing quickly, that scaling characteristic is the main attraction. A $200,000 overdraft stays at $200,000 while your turnover doubles, whereas a debtor facility grows with the ledger. Many businesses run both, using a bank overdraft for day-to-day fluctuations and debtor and invoice finance for the receivables gap. If you are still in the early stages, our business startup finance guide covers what is realistic before you have an established ledger, and the wider Business Finance section of our Knowledge Centre covers the alternatives.
Frequently asked questions
Will my customers know I am using debtor finance?
Under a disclosed factoring arrangement, yes, because the financier manages collections. Confidential invoice discounting is designed so customers continue dealing only with you and remain unaware of the facility.
Do I have to put every invoice through the facility?
Some providers require the whole ledger, others allow selective invoice finance where you choose which invoices to fund. Whole-ledger facilities are usually priced more sharply, so weigh flexibility against cost.
What happens if a customer never pays?
That depends on whether the facility is recourse or non-recourse. Under a recourse arrangement, the debt returns to you. Non-recourse facilities carry some of that risk but cost more and have stricter conditions.
Can a new business use debtor finance?
Once you are invoicing creditworthy business customers, it is often accessible earlier than traditional lending, because the assessment focuses on the debtor book rather than your trading history.
How quickly can a facility be set up?
Establishment commonly takes two to four weeks, covering ledger review, documentation and system integration. Once running, individual invoice drawdowns are usually funded within about one business day.
Cash flow gaps rarely announce themselves early, so it helps to know your options before the pressure arrives. TYG Finance can review your debtor ledger and tell you whether an invoice facility genuinely fits, or whether something simpler would do the job. Phone 1300 894 894 or start a conversation with our team. General information only, and not a substitute for advice about your own situation.