For many Australian SMEs, managing cash flow is one of the biggest challenges in day-to-day operations. Long payment terms, delayed customer invoices, and seasonal fluctuations lead to problematic cash flow gaps – making it difficult for businesses to cover operational expenses such as payroll, rent, and supplier payments.
To bridge cash flow gaps, businesses often turn to invoice finance and/or receivables finance, two financing options that have been designed to unlock the capital tied up in unpaid invoices. While these terms are sometimes used interchangeably, they are distinct funding solutions with different implications. When assessing the best cash flow solutions available to them, it’s essential that small-to-medium sized enterprises (SMEs) understand differences between invoice financing and receivables financing.
In this article, OptiPay breaks down how both invoice finance and receivables finance work, their key differences, and which might be the right fit for your business in 2025.
What is Invoice Finance?
It’s a flexible funding solution that allows businesses to access a percentage of the value of their unpaid invoices upfront, rather than waiting for customers to pay. This helps businesses maintain a steady cash flow by converting outstanding invoices into immediate working capital.
The process is simple; when a business issues an invoice to a customer, instead of waiting 30, 60, or even 90 days for payment, they can use invoice financing to receive an advance, usually 70-90% of the total value. Once the customer pays the invoice, the remaining balance is released, minus any financing fees.
There are two types of invoice finance:
#1: Invoice Factoring
Under this method, a business sells its unpaid invoices to a third-party financial provider (a factor) (ie, OptiPay), who takes over the responsibility of collecting payments from customers. This option is beneficial for businesses that want to free up resources and time spent on chasing invoices whilst also improving cash flow management.
Pros:
- Immediate access to working capital
- Outsourcing payment collection which reduces administrative burden
- Can be easier to qualify for than traditional loans
Cons:
- Customers are aware of the financial arrangement as the factor collects payments directly from them (potential reputational disruption)
- Can come with higher fees in comparison to other forms of financing
- Businesses don’t have control over all customer interactions
#2: Invoice Discounting
With invoice discounting, the business retains control over payment collection from customers but still receives an advance on unpaid invoices. The company is responsible for collecting payments and then repaying the finance provider once invoices are settled.
Pros:
- More discreet than factoring as customers are unaware of financing arrangements
- Business retains complete control over receivables management
- Commonly lowers fees compared to invoice factoring
Cons:
- Requires strong payment collection processes as the business is still responsible for payment collection and chasing unpaid invoices
- Lenders may have stricter requirements compared to invoice factoring
Why Australian SMEs Use Invoice Finance
For many SMEs in Australia, invoice financing is a lifeline for managing cash flow without taking on (additional) debt. It’s particularly useful for businesses in industries with long payment cycles, such as manufacturing, construction, and transport and logistics. Across these industries, there are high upfront costs, as well as operational costs, and long payment cycles.
Through implementation, businesses can cover day-to-day expenses, invest in growth opportunities or new equipment, and avoid the financial strain caused by late customer payments.
What is Receivables Finance?
While invoice finance focuses on advancing funds based on individual invoices, receivables finance takes a broader approach by providing funding based on a company’s entire accounts receivable ledger.
Through receivables financing, a provider may offer a revolving credit facility based on the total value of accounts receivable. This allows businesses to access working capital at a much larger scale, making it a viable option for larger enterprises who have a high volume of receivables.
Receivables finance can include:
Asset-based lending (ABL): a secured loan based on the value of receivables
Securitisation of receivables: a more complex financing structure where receivables are pooled and used as collateral for funding
Traditional invoice finance models: some providers use the term “receivables finance” to describe invoice factoring and invoice discounting, leading to confusion
Key Differences Between Invoice Finance and Receivables Finance
While both solutions optimise cash flow management, they cater to different business needs. Here is a breakdown of their key differences:
Scope of Service
Invoice Finance: Used for individual invoices, allowing businesses to unlock funds tied up in specific unpaid invoices. This method is straightforward and tailored for short-term funding needs.
Receivables Finance: Encompasses a business’s entire accounts receivable ledger, providing a more comprehensive funding option. It’s typically used by larger businesses needing access to a revolving line of credit or structured finance solutions.
Ideal Business Size
Invoice Finance: Suited for small to medium-sized enterprises (SMEs) with occasional cash flow gaps due to long payment terms. Ideal for businesses with annual revenues under $10 million.
Receivables Finance: Designed for enterprise businesses with a higher volume of receivables.This accommodates businesses that require significant and continuous funding.
Payment Collections
Invoice Finance: Control varies based on the type. Either the lender manages payment collections, or the business retains control over customer payments.
Receivables Finance: The business typically maintains control over the collection process, which is beneficial for companies with established credit control systems.
Funding Model
Invoice Finance: Provides a cash advance based on the value of individual invoices, ranging from 70% to 90% of the invoice amount. The remaining funds are released when a customer settles their invoices.
Receivables Finance: Offers a broader credit facility, often as a revolving line of credit, based on the total value of accounts receivable. This provides larger funding and greater flexibility.
Complexity
Invoice Finance: Easier to set up with minimal documentation and a quick approval process. Suitable for businesses needing immediate liquidity without extensive paperwork.
Receivables Finance: More structured and requires detailed financial documentation and assessment, including creditworthiness, receivables aging, and overall business performance. Often involves legal documentation and audits.
Cost Structure
Invoice Finance: Costs include service fees, discount rates, and sometimes additional charges based on volume or duration. The fees range from 1% – 5% of the invoice value.
Receivables Finance: Involves interest rates that are similar to traditional loans, along with service fees. Costs depend on the credit facility’s size, risk assessment, and the duration of the agreement.
Which Option is Better for Australian SMEs?
Deciding which solution will be better suited for your business depends on factors like business size, industry, cash flow requirements, and operational complexity.
Cheat Sheet: When to Choose Invoice Finance
Small to Medium-Sized Enterprises (SMEs): Ideal for SMEs needing immediate cash flow to cover operational expenses like payroll, rent, and supplier payments.
Irregular Cash Flow: Suitable for businesses facing sporadic cash flow gaps due to long customer payment terms, especially in industries like manufacturing and construction.
Simpler Setup: If the business prefers a straightforward setup with minimal documentation and quick access to funds, invoice finance is the best choice.
Maintaining Customer Relations: Businesses that want to retain control over customer interactions should consider invoice discounting, as it allows them to handle collections discreetly.
Cheat Sheet: When to Choose Receivables Finance
Larger Enterprises: Appropriate for companies with a significant volume of receivables and established credit management systems, typically with annual revenues above $10 million.
Continuous Funding Needs: Beneficial for businesses requiring ongoing access to working capital through a revolving line of credit, ensuring stable cash flow for large-scale operations.
Structured Finance Requirements: Suitable for businesses with complex financial needs, including those seeking asset-based lending or securitisation to support long-term growth.
Strong Credit Control: If the business has robust credit control processes and prefers to maintain full control over collections while accessing significant funds, receivables finance is advantageous.
Blog in Summary
Both invoice financing and receivables financing play important roles in helping Australian businesses optimise their cash flow. Invoice finance offers a simple, accessible solution for SMEs looking to cover immediate expenses, while receivables finance provides a more comprehensive, structured approach for larger enterprises with ongoing financial needs.
Ultimately, the choice depends on the unique requirements of your business.
