A $100,000 invoice can look healthy on paper, but it does not pay fuel, wages, materials or the deposit on a new piece of equipment while you are waiting 30, 60 or 90 days to be paid. This invoice funding example shows how a business can turn part of an unpaid invoice into working capital sooner, along with the costs and conditions that need to stack up.
Invoice funding can suit businesses that issue invoices to established customers, particularly transport operators, contractors, wholesalers and trade businesses working on larger commercial jobs. It is not a replacement for profitable work or good payment processes. It is a way of closing the gap between finishing the job and receiving payment.
An invoice funding example in plain English
Imagine a Brisbane civil contractor has completed a drainage package for a commercial builder. The contractor sends a $100,000 invoice, including GST, with 60-day payment terms.
The work is complete, the invoice is valid and the builder has a solid payment history. However, the contractor needs cash now to cover subcontractor costs and secure an excavator attachment for the next project. Waiting two months could mean passing up profitable work.
An invoice funder agrees to advance 80% of the invoice value once it has checked the invoice and assessed the customer who is due to pay it.
That means the contractor receives $80,000 upfront. The remaining 20%, or $20,000, is held back as a reserve until the customer pays the invoice.
For this example, assume the funding fee is 2.5% of the invoice value for the 60-day period. The fee is $2,500. When the customer pays the full $100,000, the funder releases the reserve less its fee:
- Invoice value: $100,000
- Initial advance at 80%: $80,000
- Reserve held back: $20,000
- Funding fee at 2.5%: $2,500
- Reserve returned after payment: $17,500
The contractor receives $97,500 in total, with $80,000 available straight away and $17,500 paid once the customer settles the invoice. The cost of accessing the funds earlier is $2,500.
That may be worthwhile if the $80,000 allows the contractor to complete another job, avoid disrupting suppliers or put an income-producing asset to work. It may not be worthwhile if the invoice is likely to be paid in a few days or the cash is not needed for a clear business purpose.
What changes the numbers?
The advance rate and fee in an invoice funding example are illustrative, not standard. A funder may advance a higher or lower percentage depending on the industry, invoice size, debtor quality, payment terms and how concentrated the business is with one customer.
A transport company invoicing a large, reliable national customer may present differently to a new contractor invoicing a smaller builder with limited trading history. The funder is usually looking closely at the party expected to pay the invoice, as well as the applicant business and the quality of its records.
Timing matters too. Some facilities charge a fixed fee for an agreed period. Others charge based on how long the invoice remains outstanding. If the customer pays late, the cost can increase under certain arrangements. Ask for a clear illustration showing the fee at the expected payment date and what happens if payment is delayed.
There may also be establishment fees, line fees, drawdown fees or minimum monthly charges. A low advertised rate does not always mean the lowest overall cost. The practical question is simple: how much cash will arrive now, how much will be returned later, and what is the total dollar cost?
The process behind the cash advance
Invoice funding is generally quicker than waiting for a traditional business lending application, but it is not automatic. The funder needs confidence that the invoice represents completed work or delivered goods and that the customer is likely to pay.
You will commonly be asked for the invoice, purchase order or contract, proof of delivery or completion, customer details, recent bank statements and debtor ageing information. For ongoing facilities, a funder may also review your invoicing systems and business trading history.
Once approved, the exact process depends on the structure. In some arrangements, your customer is notified and pays the funder directly. In others, the facility may be managed differently, subject to the funder’s requirements. Neither approach is automatically better. The right fit depends on your customer relationships, industry and how you want collections handled.
If your client disputes the work, raises a variation issue or simply refuses to pay, funding does not make the underlying issue disappear. Most invoice finance arrangements place responsibility back on the business if the customer does not pay, although terms vary. This is why clean paperwork, signed delivery records and clear payment terms matter.
When invoice funding can make sense
Invoice funding tends to work best when a business has a short-term cash-flow gap created by legitimate invoices, not an ongoing shortage caused by weak margins. It can be useful when growth is stretching cash reserves, such as when a tradie business wins a larger commercial contract and needs materials or labour before progress claims are paid.
It can also help a freight operator cover operating costs while waiting on invoices from regular customers, or an equipment supplier manage a long customer payment cycle without delaying stock purchases. In these situations, speed can have real value because the business can keep taking on work rather than waiting for its cash cycle to catch up.
There are trade-offs. Funding fees reduce the margin on the job, and a facility can become expensive if invoices stay unpaid longer than expected. It also relies on customers that are creditworthy and willing to pay within reasonable terms. If a business is constantly using invoice funding just to meet day-to-day obligations, it is worth looking carefully at why cash is tight and whether a different business finance structure would suit better.
Questions to ask before you fund an invoice
Before signing up, focus on the details that affect your cash position and customer relationships. You should know the advance percentage, all fees, the expected approval and funding timeframe, and whether there are minimum use requirements.
It is also sensible to ask what happens when an invoice becomes overdue, whether the facility is disclosed to your customer, and whether you are funding individual invoices or committing to a broader ongoing arrangement. Check whether there are limits on which customers or invoice types can be funded.
Read the terms around disputes and repayments closely. For example, a customer may withhold part of an invoice because of a defect claim, a variation or a missing document. Know who is responsible for resolving that issue and whether you must repay the advance while it is being sorted out.
Invoice funding versus other working capital options
Invoice funding is one way to access working capital, but it is not the answer for every situation. It is tied to specific unpaid invoices, so it can suit a business with reliable commercial customers and a clear pipeline of completed work.
A business loan may be more suitable when funds are needed for a broader purpose that is not linked to invoices. Asset finance can be a better fit where the goal is to purchase a truck, ute, machine or other income-producing equipment, rather than use cash reserves for the purchase. Matching the finance structure to the purpose can protect day-to-day cash flow and make repayments easier to plan.
Rivercity Finance can help business owners compare working capital and asset finance options through a panel of more than 40 Australian lenders, without the headache of approaching lenders one by one. The best option depends on your trading cycle, the asset or expense involved, and how quickly you need funds available.
A good invoice funding arrangement should give you breathing room, not create another problem to manage. Start with your actual cash-flow timing, use realistic payment assumptions, and make sure the cost of early access is justified by the work or opportunity it allows your business to pursue.