Quick answer: Debt Factoring is a working capital facility that advances a proportion of an unpaid invoice as soon as you raise it, instead of making you wait out your customer’s payment terms. ScotPac advances up to 85% of the invoice value, its team handles the collections, and the balance less the facility fee is released once your customer pays. Despite the name, it is not borrowing in the ordinary sense. You are not taking on a new obligation to be repaid out of future trading. You are collecting a receivable you have already earned, earlier. The money is already yours. Factoring changes when you get it.
That distinction matters more than any other feature of the product, because it changes what the facility is for. Waiting on payment terms is not a problem you grow out of. It is a problem that grows with you, because every new order is funded before the last one has been paid.
Why does a business run out of cash while trading well?
Selling on trade credit puts distance between the work and the money.
A typical cycle runs like this:
- You deliver the goods or complete the work
- You raise an invoice on 30, 60 or 90 day terms
- Your staff, suppliers and overheads are paid in the meantime
- You take on the next order, and fund that one too
- Your customer pays, on their schedule rather than yours
Your costs land early in that sequence. Your revenue lands at the end of it. Everything in between comes out of your own reserves.
This is why a business can be trading well, winning larger contracts, and still be unable to say yes to the next one. The profit is real. It is currently in the form of an invoice. And the faster the business grows, the more of its own cash is tied up in that form at any given moment, because each new order is larger than the one still waiting to be paid.
Debt Factoring exists to close that gap.
What is Debt Factoring?
Debt Factoring, also called Invoice Factoring, lets a business use its accounts receivable to access working capital. You submit an unpaid invoice to the finance company and receive an advance against it straight away. The finance company then collects the payment from your customer and releases the balance to you, less its facility fee.
Two features separate it from a Business Loan or an overdraft:
- It scales with your sales, not with your balance sheet. Funding is tied to the value of your ledger, so the facility grows as your invoicing grows rather than being fixed at the limit you were approved for last year.
- It is settled by your customer, not by a repayment schedule. The advance is retired when the invoice it funded is paid, rather than in instalments that fall due whether or not you have traded.
ScotPac’s Debt Factoring facility does not require your home or personal assets as collateral, and does not require any form of security other than the unpaid invoices being funded. It is a business to business facility, for companies selling to other companies on trade credit terms.
How does Debt Factoring work?
A single invoice moves through four stages:
| Stage | What happens |
|---|---|
| 1. Invoice | You deliver the goods or service and raise an invoice on your normal trade credit terms, then submit it to the facility |
| 2. Advance | You receive an advance of up to 85% of the invoice value, with funds available in as little as 24 hours from approval |
| 3. Collections | ScotPac’s team carries out the accounts receivable and collections activity and pursues payment from your customer |
| 4. Settlement | Your customer pays the invoice in full, and the remaining balance is released to you less the facility fee |
The thing to notice is that stages two and four are separated by the whole of your customer’s payment term. That separation is the product. Everything else is administration.
What does Debt Factoring look like on a single invoice?
Take a $40,000 invoice, raised on 30 day terms.
- You submit the invoice and receive an advance of up to 85% of its value. At 85%, that is $34,000, available in as little as 24 hours from approval.
- The remaining $6,000 stays with the facility while the invoice is outstanding.
- Your customer pays the $40,000. The balance is released to you, less the facility fee.
You did not gain or lose $40,000 in that sequence. You moved the bulk of it forward by a month, and the fee is the price of that month. Whether that is worth paying depends entirely on what the month is worth to you: a supplier discount for early settlement, a second contract you can now staff, a delivery window you could not otherwise have met.
The cost is typically a small percentage charged as a facility fee with costs varying depending on your business, your customers, and the services you choose. Pricing is quoted per business, so treat any rate you see published anywhere as an illustration rather than a quote.
Is Debt Factoring considered debt?
The name is the problem here. The debt in Debt Factoring refers to the debts owed to you, your debtors, not to debt you are taking on.
No new money is being lent against your future trading. The advance is settled by the payment of the specific invoice it was raised against, by the customer who owes it. That is a different economic event from borrowing, and it is why the facility is available to businesses that would not clear the criteria for a bank loan or overdraft. ScotPac notes that its assessment focuses primarily on your customers’ creditworthiness rather than your own credit score.
Two honest qualifications. First, how a facility is presented in your accounts depends on how the agreement is structured, and that is a question for your accountant rather than your lender. Second, in a recourse arrangement the obligation can come back to you if your customer does not pay. That is the next section, and it is the part most worth reading carefully.
Debt Factoring or Invoice Discounting: who chases the invoice?
Both release cash against invoices you have already raised. The substantive difference is who does the collecting – with factoring the lender takes responsibility for collecting payment, and with discounting your company retains control and responsibility.
| Debt Factoring | Invoice Discounting | |
|---|---|---|
| Who collects | The finance company pursues payment from your customers | Your business keeps the collections function in house |
| Who your customers deal with | ScotPac’s team, so customers will be aware of the arrangement | Your own accounts team, as before |
| What it tends to suit | Businesses without a dedicated credit control function, or ones that would rather not build one | Businesses with an established internal collections team |
Neither is the senior option. A factoring facility removes a job from your week. A discounting facility keeps a customer relationship entirely in your hands. Which of those is worth more is a question about your business, not about the products.
Recourse and non-recourse: who carries it if a customer does not pay?
This is the single most important term in any factoring agreement, and the one most often skimmed.
- Recourse factoring. You remain liable for the invoice if your customer fails to pay it. The finance company carries less risk, and fees are priced accordingly.
- Non-recourse factoring. The finance company absorbs the loss on defined events, most commonly customer insolvency. The protection is real but narrower than the label suggests, and it is priced for the risk being transferred.
Those are market wide categories rather than ScotPac product names. ScotPac does not designate its own facilities as either one. What it points to instead is Bad Debt Protection, an optional addition to its Invoice Finance solutions, which safeguards a business from bad debts arising from customer insolvency or inability to pay. You nominate the customers who account for a significant share of your turnover, and ScotPac uses market intelligence to set appropriate limits. Separately, ScotPac credit checks your customers before approving a facility, which is a check on concentration risk before it becomes a loss.
The practical point: do not assume a facility transfers customer risk because it is marketed as reducing it. Ask which events are actually covered, what proportion of the debt is covered, and what is excluded. Get it in writing.
Do I have to factor every invoice?
No, and this is the assumption that most often stops businesses looking at the product properly.
ScotPac states that you do not need to submit all of your invoices, and that arrangements can be tailored so you control which outstanding invoices are submitted. It also offers Selective Invoice Finance, which lets a business choose which invoices to submit and how long it wants access to the facility.
That changes how the product can be used. It does not have to be the way you fund the whole business. It can be the way you fund the one contract that is larger than everything around it, for the period it is outstanding, and then stop.
Who is Debt Factoring for?
On ScotPac’s published criteria, it suits businesses that:
- Sell to other businesses on standard trade credit terms, rather than direct to consumers
- Generate over $10,000 in sales every month
- Are limited companies, sole traders, partnerships or start ups, all of which are eligible
- Have creditworthy customers, since the assessment leans on their credit standing more than yours
- Are growing, and are finding that growth consumes cash faster than it returns it
Debt Factoring is workable both as a short term measure, for example to cover an unexpected operational cost or a stock purchase, and as a long term arrangement supporting ongoing growth and expansion. It is not a product you have to commit to permanently to use once.
What Debt Factoring does not do
Worth being direct about the limits, because this is where expectations break:
- It is not confidential. As part of a Debt Factoring facility customers will be aware of the arrangement. If keeping the finance arrangement out of the customer relationship matters to you, Invoice Discounting is the conversation to have instead.
- It does not make a slow customer pay faster. It changes when you receive the money, not when your customer parts with it. A customer who habitually pays at 75 days still pays at 75 days.
- It does not suit every invoicing model. ScotPac’s Invoice Finance eligibility notes that businesses invoicing in stages, invoicing in advance, or invoicing consumers may not be eligible. If you bill on milestones, raise it in the first conversation rather than the fourth.
- It is not free capital. The facility fee is the price of the time you are buying. That is a reasonable trade when the time earns more than it costs, and a poor one when it does not.
- It does not repair a margin that does not work. Finance changes the timing of cash. It does not change the economics of a deal.
How do you arrange Debt Factoring in Australia?
Banks offer receivables facilities, generally assessed against your balance sheet and often against property security. Non bank lenders tend to differ in how quickly they assess, how flexibly the facility can be structured, and how much weight they put on the quality of your sales ledger rather than the age of your business.
ScotPac has been funding Australian and New Zealand businesses for over 35 years, and its Invoice Finance facilities scale to $200 million. For the facility detail, structure, terms and eligibility, see the ScotPac Debt Factoring page.
Questions to put to a provider before you sign
These vary enough between lenders that a general answer is worth very little. Ask directly, and get the answers in writing:
- If my customer does not pay, does the debt come back to me? Which events are covered, and what proportion of the debt?
- Will my customers be told the facility is in place, and what will they be told?
- Does the facility need to cover my whole debtor ledger, or can I choose which invoices go in?
- My bank holds security over my business. What consents between lenders will this need, and how long do they take?
- What does the facility cost in a month where I invoice very little? Are there minimum volumes, minimum fees or notice periods?
- What happens to a disputed invoice, or one that is part paid?
- How will this be treated in my accounts, and could it affect my ability to borrow elsewhere?
Fund the next order out of the invoices you have already raised
If your own cash is covering the distance between delivering the work and being paid for it, that distance gets more expensive every time the business grows. The capital to close it is already on your ledger.
Speak to a ScotPac lending specialist about how your invoicing actually runs and which structure fits it.
