What is factoring in business finance?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Factoring is a way of raising cash by selling a business's unpaid customer invoices to a finance company, called a factor, for less than their face value. The business gets money straight away, and the factor then collects payment from the customers. It is also known as debtor's finance or accounts receivable finance.
In factoring, the factor obtains the right to collect the invoices, and customers usually pay the factor. Factoring is one form of invoice finance. Another form is borrowing against invoices while keeping them, which is the narrower meaning of invoice finance used in business.gov.au's glossary.
In the books, factoring needs careful tracking. Each sold invoice has to be identified, along with the amount the factor paid for it and the difference the factor kept, so that customer accounts, the bank account and the factor's statements can all be matched. Whether sold invoices come straight out of accounts receivable, and how the factor's charges are recorded, depends on the agreement and is a question for your accountant.
In Australia
In business.gov.au's glossary, factoring is the sale of a business's outstanding invoices to a factor company, which pays less than their full value and takes over chasing the debtors. The glossary gives debtor's finance and accounts receivable finance as other names for it, and keeps invoice finance as a separate entry: finance based on accounts receivable where the invoices stay with the business.
Its guide to business loans files invoice factoring under invoice finance: the business is paid for its unpaid invoices up front, at less than their face value, and the buyer then does the collecting. Its guide to choosing funding lists factor companies among the sources of finance, alongside banks, non-bank lenders and suppliers offering trade credit.
Worked example
| Item | Amount (AUD) |
|---|---|
| Unpaid invoices sold to the factor | 24,000.00 |
| Paid by the factor to the business | 22,320.00 |
| Difference kept by the factor | 1,680.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Chasing a customer for an invoice that has already been sold to the factor.
- Recording only the cash received from the factor, so the factor's charge never appears in the books.
- Mixing up factoring with invoice finance in its narrower sense, where the invoices stay with the business.
Related terms
Related service
Accounts payable and receivable
Bills and invoices tracked, with you approving every payment.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose your funding
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.