Financial management

Is debt factoring right for my business?

- August 1, 2018 2 MIN READ

Small businesses rely on their cash flow to stay afloat. When their capital is tied up in unpaid invoices, it can cause real issues. Debt factoring could be the answer. But is a smooth cash flow worth the loss of some profit?

Cash flow is critical for small businesses and if money is tied up in unpaid invoices, it can cause real issues, especially with traditional lenders like banks reluctant to lend to small businesses.

One answer is debt factoring or invoice financing. You sell your invoices to a factoring provider and around 85–90 percent of capital from the unpaid invoices becomes immediately available to you.

Here’s how it works: say a customer owes you $10,000 – the factoring provider agrees to buy the invoice for $9,700 in cash, which includes a three per cent fee. They will advance you 85 percent of the invoice ($8,245) and collect the invoice payment from the customer when it’s due. The remaining amount owing ($1,455) will then be paid to you.

What are the options?

Depending on which company you go with, there are a number of different types of debt factoring available:

  • Secret – It’s possible for some providers to offer a ‘confidential service’ where your customers don’t know their invoices are being dealt with by a third party.
  • Recourse – This type of factoring doesn’t give you any protection from bad debts. If a customer doesn’t pay the invoice, you will be required to pay the amount in full to the provider.
  • Non-recourse – The debt factor bears the cost of bad debts. Of course, this requires you to pay a little more to the provider to cover the risk.

Pros and cons

It’s a great way to unlock essential capital and get cash fast, but there are some strong pros and cons to consider:


  • It makes cash available quickly, meaning you can draw out money as soon as you’ve invoiced a customer
  • Customers are more likely to pay promptly to a third party
  • With cash flow no longer a problem, you can reduce your overheads
  • If you decide to go with non-recourse factoring, your business is protected even if a customer is very late or doesn’t pay at all
  • No collateral required – it’s unsecured financing, meaning that it doesn’t need to be backed by an asset such as real estate.


  • It can be expensive. It’s always worth looking for any hidden fees such as application and processing fees.
  • Customers may not like dealing with a third party
  • The factoring provider might not approach your customers in the same way as you, possibly jeopardising future business
  • You don’t receive the full invoice amount, which means a reduction in profits
  • If you choose recourse factoring, you’re still liable if the customer doesn’t pay within the 120 days (usually) time frame
  • Getting out of a factoring agreement can be tricky – you might have to give three months’ notice and all monies will have to be paid in full to the factoring provider before you are released.

Is my business eligible?

Most providers impose a turnover limit for businesses of around $200,000–$500,000 and upwards. Although, increasingly, invoice financiers are offering services to startups.

It’s also possible that the service will reject your application if you have too many invoices unpaid for 90 days or over.

If you’re confident that your customers will pay within 90 days, then debt factoring could be a useful service for unlocking essential capital in your business. But, as with any debt company, it’s vital to check the fine print and get an idea of their debt collection methods.