Debtor Factoring: What It Is, How It Works, and Alternatives

Debtor factoring is another name for invoice factoring — a form of business finance where a company converts outstanding invoices into immediate cash by selling them to a third party. The terms are used interchangeably across Australia and New Zealand.

What Is Debtor Factoring?

When a business raises invoices against its customers (debtors), it typically waits 30-90 days to receive payment. Debtor factoring accelerates this process by selling those invoices to a factoring company at a discount.

The factoring company provides immediate cash — usually 70-90% of the invoice value — and then collects payment from the business's customers directly.

How Debtor Factoring Works

1. Business completes work and raises invoices against customers
2. Invoices are assigned to the factoring company
3. Factor advances a percentage of the invoice value immediately
4. Factor contacts the customers to collect payment
5. When customers pay, the remaining balance (minus fees) is released to the business

Recourse vs Non-Recourse Factoring

Recourse factoring: If the customer fails to pay the invoice, the business must buy the invoice back from the factor. The business retains the credit risk. This is the most common type for SMEs.

Non-recourse factoring: The factor assumes the credit risk. If the customer does not pay, the factor absorbs the loss. This is more expensive and less common, typically reserved for businesses with very creditworthy debtors.

The Limitations of Traditional Debtor Factoring

Traditional debtor factoring has several features that do not suit all businesses:

• Customers are notified that invoices have been sold and directed to pay a third party
• Whole-ledger commitment is common — you cannot choose individual invoices
• Contracts are typically 12+ months with exit fees
• Loss of control over the debtor relationship and collection process

A More Flexible Alternative

FundTap provides the cash flow benefit of debtor factoring without these restrictions. You select individual invoices to fund — there is no whole-ledger commitment. Your customers are never notified and continue to pay you directly. There are no long-term contracts.

Funds arrive within hours through direct integration with Xero, MYOB, or QuickBooks. For businesses that want the liquidity benefit of debtor factoring with more flexibility and less disruption to customer relationships, this is a meaningful alternative.