Debtor finance is funding that uses your unpaid customer invoices (your debtors) as the security or source of repayment. It is sometimes used as the umbrella term that includes both factoring and invoice discounting, and sometimes used more narrowly to mean factoring specifically. Either way, it solves the same business problem: cash is locked up in invoices you have already earned but cannot yet spend. This article covers how debtor finance works, the structures available, and where it fits. For deeper context, see what is invoice finance and how does it work and the comparison of invoice finance vs factoring vs invoice discounting.
The core mechanism
Your business invoices a customer on credit terms (30, 60 or 90 days). Without debtor finance, you wait the full credit period before collecting the cash. With debtor finance, the lender advances a percentage of the invoice value as soon as you raise it, usually 80 to 90 per cent. When the customer pays, the lender takes the balance plus their fee.
The "debtor" in debtor finance refers to your customer (your debtor) who owes you the money. The lender is effectively lending against the customer's obligation to you. Your customer's creditworthiness matters as much as yours in the underwriting.
The terminology problem
The Australian market uses "debtor finance", "invoice finance", "factoring" and "invoice discounting" with significant overlap, sometimes interchangeably. The cleanest framing:
Debtor finance / invoice finance: umbrella terms covering any product that funds against unpaid invoices.
Factoring: the version where the lender also collects from your customer directly.
Invoice discounting: the version where you continue managing collections and the lender stays in the background, confidential to your customer.
When you see "debtor finance" advertised, it most often means factoring (visible to customer). When you see "invoice discounting", it means the confidential version. When you see "invoice finance" alone, ask which structure they actually mean.
When debtor finance is the right tool
Debtor finance fits B2B businesses where the structural problem is the gap between issuing invoices and being paid. The pattern shows up most clearly in:
Labour hire and recruitment. Weekly or fortnightly payroll obligations against 30 to 60 day customer payment cycles. Debtor finance is so common in this industry that customers do not blink at it.
Transport and logistics. Freight invoices funded immediately while the receivable trickles in over the standard payment period.
Manufacturing and wholesale. Cost-of-goods and supplier payments happen well before customer collections; debtor finance smooths the cycle.
Services businesses with project-based billing. A consultancy invoicing $200,000 on completion can free up that working capital immediately instead of waiting 60 days.
When it is not the right tool
Debtor finance does not fit when the underlying issue is something other than invoice timing. Common misfits:
B2C businesses with no invoice ledger.
Businesses where customers pay on the spot or via credit card.
Businesses with one or two very large customers (lender does not want concentration risk).
Businesses with a structural profitability issue. Debtor finance accelerates the cash but does not fix the margin. See what is working capital for the operational levers to pull first.
What you pay for
Two cost components, regardless of which structure you choose:
Discount fee or interest rate on the cash advance. Usually quoted per month or as a margin over the lender wholesale rate.
Service fee. A flat percentage of invoice value, often 0.5 to 2 per cent. Sometimes called a "factor rate" or "facility fee".
The all-in annualised cost on a typical debtor finance facility runs between 8 and 25 per cent depending on industry, advance rate, customer profile, and structure. Compare that against the value of unlocking the cash and the cost of alternatives like a term loan or overdraft.
Recourse vs non-recourse
Most debtor finance is recourse, meaning if your customer never pays, you owe the lender back. Some lenders offer non-recourse facilities where they take the customer credit risk (subject to specific exclusions). Non-recourse is more expensive but useful if you have customer concentration or specific credit concerns.
Setting it up
A typical engagement runs as follows. We map your business: customer profile, invoice volume, average invoice size, payment terms, current cash flow problem. We compare lenders most active in your industry: some specialise in labour hire, others in transport, others in general B2B. We share two or three indicative term sheets so you can compare advance rate, fees, contract length, and operational requirements.
Once you choose a lender, documentation takes 2 to 4 weeks for a new facility (longer than a working capital loan because the lender wants to assess your debtor book in detail). After the facility goes live, the operational rhythm is: invoices in, advances out within a day or two.
Where to from here
We compare debtor finance, factoring and invoice discounting across our whole lender panel, including specialists for labour hire, transport, and general B2B. No fees to clients; the lender pays us when the facility settles. Book a 20-minute brief to map your options.
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