For a business that sells to other businesses, the balance sheet often looks healthier than the bank account. The work is done, the invoice is out, the money is coming, just not until the 20th of next month, or 60 days, or whenever the client’s accounts payable run happens. The Reserve Bank’s 2026 Financial Stability Report noted that banks were seeing more requests for working capital limit increases as cost pressures rose. Invoice finance is one of the oldest tools for exactly this gap.
How does invoice finance work?
The basic cycle:
- You invoice your customer as normal.
- You submit the invoice (or your whole debtor ledger) to the funder.
- The funder advances a large portion of the invoice value, often within a day or two.
- Your customer pays: either the funder directly (factoring) or you, who pass it on (discounting).
- The funder releases the remaining balance, minus its charges.
Security is typically registered over your receivables on the PPSR.
Factoring vs invoice discounting
| Factoring | Invoice discounting | |
|---|---|---|
| Who collects | The funder | You |
| Do customers know? | Usually yes | Usually not |
| Credit control help | Often included | You do it |
| Suits | Smaller or fast-growing firms without strong credit control | Established firms with good systems |
| Admin | Funder handles much of it | Regular reporting to funder |
There are also variations: selective or single-invoice finance (funding chosen invoices rather than the whole ledger) and recourse vs non-recourse (whether you or the funder carries the risk if a customer never pays).
What does it cost?
Invoice finance usually involves a mix of charges: a discount or interest charge on funds advanced, and service or administration fees. Some facilities have minimum terms or minimum volumes. Because the structure varies so much between funders, compare the total cost for a typical month of your actual invoicing, not a headline figure.
Who is invoice finance good for?
- B2B businesses with reliable customers on 30 to 90 day terms.
- Growing businesses whose sales are outstripping working capital. Invoice finance grows with sales, which a fixed overdraft doesn’t.
- Businesses with seasonal or project-based billing peaks.
- Firms whose property or credit history makes other lending harder.
Who is it not good for?
- Retail and cash businesses: no invoices to fund.
- Heavily concentrated debtor books: if one customer is most of your ledger, funders limit exposure.
- Progress-claim construction: retentions, disputes and set-off rights complicate things. Some funders specialise; many avoid it.
- Owners who don’t want customer contact: consider discounting or a line of credit.
- Needs beyond working capital: invoice finance won’t buy a machine or pay out IRD.
The downsides to weigh
- Customer perception. Some customers read factoring as a sign of stress, though it’s common in many industries.
- Dependency. Once your cash cycle relies on advances, stepping off requires a buffer.
- Contract restrictions. Some customer contracts restrict assignment of receivables. Check before you sign up.
- Disputes. If a customer disputes an invoice, the funder may reclaim the advance.
How to set it up well
- Clean up your debtor ledger: chase old debts and resolve disputes first.
- Know your customers’ payment behaviour; funders will look at it.
- Compare the full cost using your real invoicing pattern.
- Read the term, notice period and exit fees.
- Decide between factoring and discounting based on your credit control strength, not just price.
Alternatives if invoice finance doesn’t fit
- A line of credit sized on overall turnover, with no customer involvement. See business line of credit.
- A short-term unsecured loan for a one-off gap. See unsecured alternative lending.
- A property-secured loan from $20,000 to $1m if you want to reset working capital once rather than fund invoices forever.
- Shorter terms and deposits on larger jobs.
We compare these in alternatives to invoice factoring.
A worked example
Example scenario (illustrative only): A Hamilton electrical wholesaler sells to contractors on 20th-of-the-month terms. Sales have grown quickly after winning two new trade accounts, and stock purchases are due weeks before customers pay. With invoice discounting, the business draws against new invoices as they’re raised and repays as customers pay, so working capital grows with sales. The trade-off is monthly reporting to the funder and a cost on every dollar advanced, which the owners weigh against the margin on the extra sales.
Questions to ask an invoice finance provider
- What proportion of each invoice will you advance, and how is the balance released?
- How are charges calculated, and what’s the total for a typical month of my invoicing?
- Is the facility recourse or non-recourse?
- Are there minimum volumes, minimum terms or exit fees?
- Will you contact my customers, and how?
Where we fit
We don’t provide invoice finance. We arrange unsecured loans and lines of credit (usually trading 6+ months) and property-secured loans from $20,000 to $1m. If invoice finance is the better tool for your business, we’ll tell you.