Cashflow finance/invoice factoring

Cashflow finance is available to businesses who sell goods and services on a business-to-business basis, with no staged payments.

This type of finance bridges the funding gap created during the period from the time of an invoice is issued to a buyer to the time that the buyer pays for the goods/services.  

Hence, cashflow finance assists businesses with the financing required to deliver purchase orders from buyers. The primary security for cashflow finance is sales invoices. Cashflow finance is also known as sales finance and includes specific financing solutions such as factoring and invoice discounting.

Cashflow finance uses a revolving credit facility in which new invoices received will make new funding available. The source of income for paying back the loan is in the debtor settling outstanding invoices. Such type of finance is also termed as factoring, invoice discounting or sales/invoice finance.

Cashflow finance enables the business to release the money it's owed by its customers (account receivables) to fund business growth or to meet the day-to-day financial obligations. Credit limit to the revolving facility is sanctioned based on the assessment the borrower’s credit risk.

The two main types of cashflow finance are recourse or non-recourse. Recourse factoring assumes that customer non-payment risk is covered by the debtor (seller). On the other hand, non-recourse factoring assumes that the lender assumes customer non-payment risk.

For both recourse and non-recourse factoring, lenders support credit control and collections by providing sellers with services that help manage the sales ledger by issuing statements and provide credit control services through letters or phone calls to buyers under credit control. However, confidential invoice discounting services are available for businesses that want customers to be unaware of lender involvement. It is simple to operate, with limited administration, whereby the business retains complete responsibility over managing customer payments and credit controls.

Common use

Businesses ideally suited for cashflow finance are those that provide tangible goods or services. It is commonly used by businesses that have high levels of working capital tied up within debtors. It is also used by growing businesses who are seeking to manage their working capital. Some examples are manufacturers, wholesalers, engineers, transport companies and labour hire/recruitment service providers.


Non-recourse factoring is more expensive than recourse, since in the latter the risk is covered by the lender. The main costs involved are:

  • Discount charge – characteristics are similar to interest charges, in which a percentage of the loan value will be charged at a percentage over a base rate (typically between 2.5% and 3.5% over base rate)
  • Service charge – is charged at a percentage of the business sales and is typically between 0.5% and 3%. This charge will increase if bad debt protection is also included.

Dependent upon the size of entity there is a credit control cost to the business.


Setting up the facility for the first time normally takes a couple of weeks. Once the facility is arranged most banks will offer the ability to access cash electronically. Once the invoice is uploaded, cash is usually available to be drawn within 24 hours.


  • working capital needs are lower for the business
  • non-asset security required - main form of security being invoices
  • scalable funding that caters to rapid growth of a business
  • funding is available to start-up businesses
  • funds available within 24 hours of issuing the invoice.


  • funding availability will decline with decline of sales
  • may not be suitable for all business sectors
  • ongoing administration is required to ensure funding is available.

Other options

The right finance for your business section gives examples of financial structures that are suitable for different trading types and sizes of business.

Cashflow finance is a short term financing solution and can be useful to bridge cashflow gaps. Other types of finance suitable for this use are overdrafts and business credit cards.

For longer term financing needs, a bank loan or a commercial mortgage might be more appropriate solutions.