Updated on 4th July 2023

Finding the right funding solution for your business can be tricky, and with both invoice finance and overdraft facilities being highly useful, the decision can be even more confusing.  Nonetheless, choosing the most suitable solution for your business can reduce costs and make it easier to pay back the financing. 

Luckily, the ScotPac team of lending specialists are happy to consult with you and arrange a tailored solution for your needs.

However, if you’d like to explore the advantages and differences between these two forms of financing this article is here to help. 

We’ll outline the differences between overdrafts and Invoice Finance to ensure you better understand what each solution involves and which may be the best option for your business.

Invoice Finance

What is it?

Invoice Finance is a category of financing that includes several different facilities/solutions. It is widely used to bridge the cash gap between the issuing of an invoice and the receiving of payment at the end of extended term periods.

The most common types are Invoice Discounting and Invoice Factoring. These solutions enable businesses to leverage the value locked in outstanding sales invoices as collateral for accessing funding fast. 

For businesses wanting the capital as soon as possible, as opposed to after 30 days, they can submit the invoice for financing and receive a cash advance of up to 95% of the value upfront. Later on, once the invoice or invoices are settled, the business receives the remaining balance less any fees for the service.

Discounting vs Factoring

The main difference between Invoice Discounting and Factoring is the structure of the facility and the collection of the outstanding invoice payments. 

With Invoice Factoring, the third party finance provider owns the invoices and will thus handle the collection and credit control. This means higher service fees but less responsibility, and higher accessibility but lower levels of confidentiality.

With Invoice Discounting, the business maintains ownership of the invoices and responsibility for collecting payments from customers. This means your customer is usually unaware of the Invoice Finance facility but does require the business to have sufficient accounts receivables/debt collection capabilities.

What is Selective Invoice Finance?

Selective Invoice Finance is a third type of invoice finance where a business can choose which unpaid invoices it wishes to submit for funding. This allows for greater control and flexibility in the accessible capital.


What are they?

Most business owners are aware of how a bank overdraft works. 

In summary, it’s a credit facility that allows a business to continue to withdraw funds even after the balance in the account being withdrawn from has reached zero. 

The lender or financial institution will set a pre-agreed overdraft limit as part of the initial arrangement. Businesses can withdraw up until this limit and are charged interest for the credit used as part of the facility. Exceeding the authorised overdraft limit will usually result in higher fees and interest rates.

Unlike invoice finance, overdraft facilities are often secured with collateral such as real estate or business assets. Though, some providers who offer unsecured business overdrafts as well.

Which Is Right for Your Business: Invoice Finance vs. Overdraft?

If you’re a small or medium-sized business looking to grow, smooth over gaps in cash flow, or simply want to unlock hidden capital, invoice finance and overdraft facilities both offer advantages and disadvantages. 

Ultimately, the right option will depend on your business’s needs, objectives and cash flow. We recommend getting custom advice from our team of specialists here at ScotPac. However, to help you out, we’ll summarise the differences and general recommendations here.

Choose Invoice Finance for Growth

Invoice Finance is often the best option for fast-growing businesses. These facilities can help keep up with one’s cash flow needs and ensure that ongoing capital is accessible for even smaller businesses who might not meet the eligibility criteria of an overdraft.

Choose Overdrafts for Safety Nets

If you’re an established and larger business looking for a financial safety net to insure you for the occasional cash flow injection, a more traditional overdraft facility could work well.There are additional secured yet less traditional funding solutions as well though. Business Cash on Call is a working capital facility secured by residential property. It can be an effective way to use the extra equity in your home to access affordable cash flow financing.

Questions to Ask When Choosing Between Invoice Finance and Overdrafts

How much flexibility do you need?

Invoice Finance

Invoice Finance is one of the most flexible types of business financing facilities. You can access tailored lines of credit based on the number of invoices you choose to finance and with come-and-go options for both Selective Invoice Finance and full-service factoring including collections and account management, if you so wish, you retain complete control.


An overdraft can provide adequate flexibility for many businesses but there are restrictions. For example, additional withdrawn funds beyond the pre-arranged limit can result in costly fees and interest. For post-agreement renegotiations, you may need to speak with your facility funding provider. 

How quickly do you need the capital?

Invoice Finance

With Invoice Finance, funds can be available in as little as 24 hours. Even setting up the facility is quick and simple thanks to a streamlined application process with minimal paperwork and minimal eligibility checks. 


Overdrafts are comparatively quick to set up compared to bank loans but are still more lengthy in application and approval processes than most Invoice Finance solutions. If you’re securing your overdraft with property or assets, you’ll also need to have your lender conduct an appraisal which can cause further delay. However, once in place, your access to the overdraft’s funds is immediate. 

Do you need specific credit limits?

Invoice Finance

Invoice Finance unlocks up to 95% of your invoices’ value. The remaining 5% is provided once the invoices are settled, less any fees. Due to the nature of the facility, the more invoices you issue and submit for financing the greater your credit limit.


Business overdrafts can range quite widely in Australia. Some are as limited as $5,000 with others being in excess of $500,000. Your credit limit will depend on:

  • Your credit rating
  • Your trading history
  • Assets

Changing your credit limit to increase spending will require you to reapply.

Are you looking to save in the short term or long term?

Invoice Finance

Whether the cost of invoice financing is worth it depends a lot on your business’s objectives and risk profile. Interest rates and service fees, often based on a percentage of the total value of the invoice or invoices, can vary. We recommend speaking to a ScotPac specialist for custom feed information. 


Overdraft costs are laid out in the initial terms of your facility. Like Invoice Finance, they incur an interest fee on any withdrawn funds below a $0 balance. There may also be one-off set-up fees or ongoing account management fees to take into consideration. 

Remember, while overdrafts can be initially the more affordable way to access working capital, exceeding your limits will have an impact on both the fees and interest rates associated with your financial facility. 

Do you want to put up collateral?

Invoice Finance

With Invoice Finance, there is no need to secure a line of credit against an asset other than the outstanding invoices you’re submitting for funding. Some providers may require a personal guarantee from the business owner but this will always be discussed during the arrangement of terms. 


Most providers of overdraft facilities require a residential property or commercial asset to be used as security. Personal guarantees may also be eligible for use though this typically comes with higher interest rates and fees.

How accessible do you need your line of credit to be?

Invoice Finance

Invoice Finance is highly accessible, especially for small and medium sized businesses without a perfect credit rating. Despite not being able to qualify for more traditional financial arrangements, such as overdrafts, many businesses can access working capital through the more flexible Invoice Finance options. 


Overdraft facilities are usually stricter. Established trading history, good credit rating and appropriate collateral are often needed for approval.

To put this in perspective, in 2018, almost 50% of Australian companies with 200 employees or more received bank overdraft financing. Despite making up the smallest share of total businesses, large enterprises are more likely than SMEs to have and be able to access overdraft funding. 

A Summary of the Differences Between Invoice Finance and Overdrafts

Both Invoice Finance and overdraft facilities are solutions to help businesses access needed working capital needs. As a quick reference guide, here’s a summary of the differences between the two. 

The main point of difference is that Invoice Finance unlocks money already within your business. In contrast, an overdraft facility sets up a line of credit beyond your account balance. 

Invoice Finance is more flexible and easier to set up, especially for small and medium-sized businesses. With no security needed and less eligibility criteria, it’s favoured for fast-growing or start-up businesses needing to access money owed to them fast to keep cash flow moving.

Overdraft facilities allow set limits for businesses to access extra capital whenever they need it immediately, once the more extensive approval and set-up process has been put in place. Larger and more established businesses benefit from accessing overdrafts when occasionally or unusually necessary. 

Financing Your Business Quickly With ScotPac

Why do ScotPac’s clients grow at 3 times the rate of the average Australian business?

Because our specialists know how to put together a tailored funding solution that unlocks the potential in our clients’ businesses and fuels their growth. 

Whether you’re looking to explore Invoice Finance or an overdraft for your business, or you would like to discuss best options for your needs, our lending specialists are here to help.Give us a call on the number below or submit an enquiry using our simple online form.