TL;DR: Invoice factoring is one way to fund unpaid invoices, but it's not the only option. This guide explains the differences between factoring, invoice finance, and invoice discounting.
What Is Business Factoring and How Does It Work?
Business factoring is a financial arrangement where a business sells its outstanding invoices to a third party (a factor) at a discount in exchange for immediate cash. It is also known as invoice factoring or debtor factoring.
The Problem Business Factoring Solves
Most B2B businesses face a timing gap: they complete work, raise invoices, and then wait 30-90 days for customers to pay. During that wait, wages, materials, and operating costs do not pause.
Business factoring converts that waiting period into immediate cash — the business receives most of the invoice value now, rather than the full amount later.
How Business Factoring Works Step by Step
- Business completes work and raises invoices against customers
- Invoices are submitted to the factoring company
- Factor advances funds — typically 70-90% of the invoice value — to the business within days
- Factor manages collections — contacting the business's customers directly for payment
- On payment — the factor releases the remaining balance to the business, minus fees
Recourse and Non-Recourse Factoring
In recourse factoring (more common), if the customer does not pay, the business must repay the advance. The credit risk stays with the business.
In non-recourse factoring, the factor assumes the credit risk. This is more expensive and less common.
Typical Costs
Business factoring fees vary, but typically include a service charge of 0.5-3% of the invoice value plus a discount rate on the advance. Total effective costs depend on how long invoices take to be paid — longer payment cycles mean higher effective costs.
Limitations of Traditional Business Factoring
- Most arrangements require whole-ledger commitment — all invoices, not selected ones
- Customers are typically notified that their invoices have been assigned to a third party
- Contracts are often 12 months or longer with early termination fees
- Administration and compliance requirements can be significant
A More Flexible Option
FundTap provides the cash flow benefit of business factoring with greater flexibility: choose individual invoices to fund, no debtor notification, no long-term contract, and funds available within hours through accounting software integration.
For small businesses that want working capital access without the constraints of traditional factoring, this model is worth comparing.
Related Resources
Frequently Asked Questions
How can Fundtap help my business?
Fundtap provides on-demand invoice finance for AU and NZ SMEs. Select an invoice and get funded within hours — no lock-in, fees from 4%.
Is Fundtap available in Australia and New Zealand?
Yes. Fundtap serves businesses across both countries, integrating with Xero, MYOB, and QuickBooks.
How fast can I get funded?
Most businesses receive funds within hours. Once set up, funding is typically same-day.
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