If your customers are other businesses, you probably know the feeling: work delivered, invoice sent, and then a long wait until the 20th of next month, or longer if they’re a big corporate or a government agency with its own payment cycle. Invoice factoring was built for exactly this problem. But it’s not the only answer, and for many small businesses it’s not the best one.
How does factoring work, briefly?
A factoring company buys or advances against your unpaid invoices. You get most of the invoice value quickly; the factor collects from your customer and pays you the balance, minus its charges, when the customer pays. It’s a proven model, and our invoice finance guide explains it fully.
Why look for an alternative?
- Customer visibility. Your customers deal with the factor. Some owners are comfortable with that; others worry it signals financial stress or damages relationships built over years.
- Concentration. If most of your invoices are to one or two customers, funders may limit how much they’ll advance.
- Ongoing administration. Regular reporting, debtor schedules and reconciliations add work.
- Scope. Factoring funds working capital only. It won’t buy equipment or pay out IRD.
- Small ledgers. For a modest debtor book, the setup and minimums may not stack up.
The alternatives
Confidential invoice discounting
The same underlying idea, but you keep collecting from customers and they usually aren’t told. It tends to suit established businesses with solid credit control and a spread of customers.
Non-bank line of credit
Instead of funding specific invoices, a lender sizes a revolving facility on your overall turnover. Draw when a big invoice is outstanding, repay when it’s paid. No customer contact. See business line of credit.
Short-term unsecured loan
For a one-off gap, such as a large contract paying late, a single unsecured loan may be simpler than setting up an ongoing facility.
Property-secured loan
If you own property with equity, a property-secured business loan from $20,000 to $1m can provide a larger, one-time injection of working capital. That can let you stop depending on invoice timing altogether. See second-mortgage business funding.
Fix the terms
Before financing the gap, try shrinking it:
- invoice the day work is completed, not at month-end;
- ask for deposits or progress payments on larger jobs;
- offer easy payment methods;
- follow up on day one of overdue, not day thirty;
- review credit terms for slow payers.
Which fits which business?
| Your situation | Worth considering |
|---|---|
| Fast-growing, many creditworthy B2B customers | Factoring or discounting |
| Established, good credit control, want privacy | Invoice discounting |
| Uneven cash flow, don’t want customers involved | Line of credit |
| One big late invoice | Short-term loan or single-invoice finance |
| Own property, need a bigger reset | Property-secured loan |
When factoring is still the right call
If your sales are growing quickly, your customers are large and reliable, and you’d rather outsource collections, factoring can be an excellent tool. It scales with your sales in a way a fixed loan can’t. Being even-handed means saying so.
How we help
We don’t arrange factoring. We arrange unsecured business loans and lines of credit (usually trading 6+ months, sized on turnover) and property-secured loans from $20,000 to $1m. If factoring suits you better, we’ll tell you. Start with a 60-second enquiry.