Invoice Finance vs Business Loans: Which Is Better?
Businesses often need funding to manage cash flow, support growth, pay suppliers, hire staff, purchase stock, or cover other business expenses. However, the right type of finance can depend on why your business needs funding.
For businesses waiting 30, 60, or 90 days for customers to pay outstanding invoices, invoice finance may help unlock funds tied up in those invoices. A business loan, on the other hand, may be considered when a business needs funding for a broader or specific business purpose.
In this guide, we'll compare invoice finance vs business loans, explain how each option works, and help you understand which type of business finance may better suit your funding requirements. Browse more guides on our business finance blog.
What Is Invoice Finance?
Invoice finance allows eligible businesses to access funding against outstanding invoices. Instead of waiting for customers to pay according to their agreed payment terms, businesses may be able to receive an advance against eligible invoices. This can help improve cash flow and provide access to funds that would otherwise remain tied up in unpaid invoices.
Invoice finance can be particularly relevant for businesses that regularly invoice other businesses and need to manage the gap between issuing an invoice and receiving payment. For general background on the concept, you can also read Investopedia's overview of invoice financing.
How Does Invoice Finance Work?
The invoice finance process generally follows a simple cycle:
- Submit your invoices: The business submits outstanding invoices for assessment. The invoices and the customer's creditworthiness may be reviewed as part of the process.
- Receive an advance: Once approved, the business may receive an advance against the eligible invoice value. Advances are typically in the range of 80 to 90% of the invoice value, subject to assessment and the finance arrangement.
- Customer pays the invoice: The customer pays according to the agreed payment terms, commonly 30, 60, or 90 days.
- Receive the remaining balance: Once the customer pays, the remaining balance is provided according to the finance arrangement, minus applicable fees. The process can then continue as new eligible invoices are issued.
Why Do Businesses Choose Invoice Finance?
- Immediate cash flow
- No waiting for customer payments to free up funds
- Support for business growth
- Flexible funding structures
- Flexible customer payment arrangements
- Faster setup compared with some other finance types
For businesses looking at funding options without using outstanding invoices as the basis for finance, unsecured business loans may be worth exploring.
Invoice Finance vs Business Loans for Cash Flow
Cash flow is one of the clearest differences between these two options. Consider a business that completes work and issues an invoice with 60-day payment terms. The business may have already paid wages, suppliers, or other operating expenses but still needs to wait for the customer to pay. In this situation, invoice finance may help the business access funds against an eligible outstanding invoice.
A business loan addresses a different type of funding requirement. Rather than relying on an individual invoice, the business applies for funding based on the relevant finance product and lender assessment.
| Example | Situation | Potential consideration |
|---|---|---|
| Business A | Regularly invoices business customers and waits 60 days for payment | Invoice finance |
| Business B | Needs funding for a specific business purpose not connected to unpaid invoices | Business loan or other business finance |
The appropriate solution depends on the individual business and the finance terms available.
Who May Be Eligible for Invoice Finance?
- B2B invoices: Businesses generally need invoices issued to business customers. Consumer invoices may not be eligible.
- Creditworthy customers: The customer's ability to pay may be assessed as part of the process.
- Trading history: Businesses should generally have been trading for at least six months and have a track record of invoicing.
- Regular invoicing: A consistent pattern of invoicing may be preferred.
- Australian business: Registered and operating in Australia with a valid ABN.
- Valid and undisputed invoices: Related to completed work or delivered goods.
Eligibility can vary depending on the lender and finance arrangement. See our Invoice Finance page for current overview details.
Which Is Better for Business Growth?
Neither option is automatically better for every business. The better question is: what is causing your funding requirement?
If growth is creating pressure on cash flow because customers are taking time to pay invoices, invoice finance may help unlock funds from eligible outstanding invoices. This could potentially allow a business to take on additional orders, manage supplier payments, hire staff, invest in growth, or manage seasonal fluctuations.
If the business requires funding for another purpose that is not linked to invoices, a business loan or another type of finance may be more appropriate. For growth-focused reading, see How to Grow Your Small Business with Financial Loans in Australia.
Can Invoice Finance Provide Flexible Funding?
Depending on the finance arrangement, a business may finance individual invoices, use a revolving invoice finance facility, or access funding as eligible new invoices are issued. This can make invoice finance different from a funding solution designed around a single, fixed business requirement. Structure, funding amount, fees, and eligibility will depend on the lender and the specific arrangement.
How Much Does Invoice Finance Cost?
The cost of invoice finance can vary depending on the finance provider, facility structure, invoice value, customer payment terms, and other relevant factors. Businesses should understand applicable fees, how fees are calculated, the funding terms, any other charges, and the total cost of using the finance before proceeding.
Questions to Ask Before Choosing
- Are you waiting for customers to pay invoices? If unpaid invoices are creating a cash-flow gap, invoice finance may be relevant.
- Do you regularly issue B2B invoices? Regular invoicing is an important consideration for invoice finance.
- What do you need the funding for? If the funding is for a broader business requirement rather than outstanding invoices, a business loan may be worth considering.
- How much funding do you need? The amount required can help determine which finance structure may be more suitable.
- What are the costs and obligations? Always review fees, charges, repayment requirements, and finance terms before proceeding.
Invoice Finance vs Business Loans: Which Is Better?
There is no single answer for every Australian business.
Invoice finance may be worth considering when you have eligible outstanding B2B invoices, customers take time to pay, you need to improve cash flow, you want to access funds tied up in invoices, and you have regular invoicing activity.
A business loan may be worth considering when your funding need is not based on outstanding invoices, you need funding for a specific business purpose, or you want to explore broader business funding options.
Explore related options
- Invoice Finance — Unlock cash tied up in unpaid invoices
- Unsecured Business Loans — Fast funding without property security
- Secured Line of Credit — Flexible revolving credit for cash flow
Why Choose My Biz Finance?
Choosing business finance can involve comparing different lenders, rates, terms, and funding structures. My Biz Finance acts as a finance broker and helps businesses explore available finance options from multiple lenders based on their requirements. Learn more about why businesses choose My Biz Finance.
If your business has outstanding invoices and you are looking to improve cash flow, explore Invoice Finance. If you need funding for another business purpose, you can also explore unsecured business loans. For help understanding your options, visit Support or submit an enquiry.
Frequently Asked Questions
What is the difference between invoice finance and a business loan?
Invoice finance is based on eligible outstanding invoices and may help businesses access funds before customers make payment. A business loan is generally used to provide funding for a broader or specific business purpose and is not necessarily tied to individual invoices.
Is invoice finance better than a business loan?
Neither option is automatically better. Invoice finance may suit businesses with regular eligible B2B invoices and cash-flow gaps caused by customer payment terms. A business loan may be more suitable when funding is required for another specific business purpose.
Is invoice finance available in Australia?
Yes. Invoice finance is available to eligible Australian businesses. My Biz Finance helps businesses explore invoice finance options from multiple lenders, subject to eligibility and lender assessment.
Can small businesses use invoice finance?
Eligible small businesses may be able to use invoice finance if they meet the relevant criteria. This generally includes having eligible B2B invoices, valid and undisputed invoices, a trading history, and a regular invoicing pattern.
How does invoice finance work in Australia?
A business submits eligible outstanding invoices for assessment. Subject to approval, an advance may be provided against the invoice value. The customer then pays according to the agreed payment terms, and the remaining balance is handled according to the finance arrangement after applicable fees.
What can a business loan be used for?
A business loan may be used for an approved business purpose, depending on the finance product and lender requirements. This may include growth, stock, operations, expansion, or other business funding needs. See unsecured business loans for an overview.
Is invoice finance expensive?
The cost varies depending on the lender, facility structure, invoice value, payment terms, and applicable fees. Businesses should review the full costs and terms before proceeding. See our important information for general disclosures.
Can I use invoice finance for working capital?
Invoice finance may help eligible businesses access funds tied up in outstanding invoices, which can support working capital and day-to-day cash-flow requirements.
What is better for cash flow: invoice finance or a business loan?
If cash flow is affected by customers taking 30, 60, or 90 days to pay invoices, invoice finance may be relevant because it is based on eligible outstanding invoices. A business loan may be more appropriate for a broader funding requirement that is not directly connected to unpaid invoices.
Can a business use invoice finance and a business loan together?
Whether a business can use multiple finance facilities depends on its circumstances, existing obligations, and lender requirements. Businesses should understand the terms and financial commitments of each facility before taking on additional finance. Enquire to discuss your situation.
The right choice between invoice finance and a business loan depends on your business circumstances, funding requirements, eligibility, and the finance options available. This article contains general information only and does not constitute financial, tax, or legal advice.
For related reading, see our equipment and vehicle finance guide and simple guide to business loans for small businesses.
Ready to compare invoice finance and business loan options? Contact My Biz Finance today for tailored guidance from our panel of lenders.
