What is invoice factoring?

If you're a business owner in New Zealand selling to other businesses on credit terms, you've probably had a month where the bank balance is tight, the wage run is due, and the only thing standing between you and breathing room is a pile of unpaid invoices. Invoice factoring is one of the cleanest ways to fix that — but it's also one of the most misunderstood. Here's what it actually is, in plain English.

The short version

Invoice factoring lets you turn unpaid customer invoices into cash, today, instead of waiting 30, 60 or 90 days. You hand the invoice to a finance company; they advance you most of its value (typically up to 85%) the same day. When your customer eventually pays, the finance company collects the money, takes their fee, and pays you the rest.

It is not a loan. You're selling an asset (the invoice) — not borrowing against it.

How it works, step by step

1. You do the work and issue your customer an invoice on your usual terms (say, 30 days).
2. You send a copy of that invoice to your factoring provider — often automatically, via your accounting software.
3. They advance you up to 85% of the invoice value, usually the same day.
4. The finance company manages the debtor side of things — sending statements, taking payment, chasing slow payers — until your customer pays.
5. When the customer pays in full, you receive the remaining balance (around 15%), less the agreed fee.

You spend none of your time chasing receivables, and your cash flow stops being held hostage by your slowest payers.

What does it actually cost?

For a typical NZ factoring facility you'd expect to pay something in the order of 3–4% of the invoice value across a 60-day funding window, including the debtor management service. The headline number sounds higher than a bank rate — but you have to compare like with like.

Compare it against:

• The early-payment discount you'd otherwise offer customers (often 2–5%).
• The cost of running internal credit control — staff time, software, write-offs.
• The opportunity cost of capital tied up for 60+ days in receivables.
• The interest and fees on a bank overdraft you can't actually get approved for.

For most growing NZ businesses, the maths comes out in factoring's favour — sometimes by a wide margin.

When is it worth it?

Factoring tends to suit you if:

• You sell goods or services to other businesses on credit terms.
• You're growing — and your funding needs grow with each month's sales.
• You've got customers paying you more slowly than your suppliers expect to be paid.
• You're spending real time and emotional energy chasing late payers.
• The bank either won't lend, or wants to lend on terms that don't match how your business actually operates.

It's typically not the right fit for retail/B2C businesses, project-based work where you don't issue clean invoices, or businesses where customer relationships are so fragile that any third-party contact would damage them.

What about my customers — will they know?

Under a standard factoring arrangement, yes. Your customers are notified that the invoice is being managed by the factoring company and are asked to pay them directly. In New Zealand this is normal and accepted — businesses see factoring relationships every day and it doesn't carry the stigma some owners worry about.

If keeping the arrangement private matters to you, ask about invoice discounting instead. The funding mechanics are similar, but you continue to manage your own customer ledger and the assignment is much less visible.

Questions to ask any factoring provider before signing

1. Is there a minimum term or notice period? Some providers lock you in for 12 months and charge an exit fee. Others (us included) don't.
2. Are there minimum monthly fees? Watch for "line fees" or "availability fees" charged whether or not you actually draw funds.
3. What happens if a customer doesn't pay? Will they direct-debit you the moment a debt goes overdue, or work with you on a sensible plan? This is one of the biggest practical differences between providers.
4. Is debtor management included or extra? Some providers fund invoices but leave you to chase the money. Confirm exactly what their fee covers.
5. What's the all-in cost on a worked example? Ask them to price your typical month, including all fees, and put it in writing.
6. How fast is funding once the facility is set up? Same day is standard. Anything slower is worth questioning.
7. Do you integrate with my accounting software? Xero and MYOB integration removes a huge admin burden. Without it you'll be double-handling.

The bottom line

Invoice factoring is a tool. Used well, it removes a major drag on a growing NZ business — slow payers — and gives you the working capital to take opportunities and pay your team without sweating Friday's bank balance. Used poorly (or with the wrong provider), it can be expensive, restrictive and damaging.

The single biggest predictor of which way it'll go is the provider you pick. Ask the questions above before you sign anything.