The short version
Working capital finance covers the gap between money going out and money coming in: the wages, stock and supplier bills you have to pay before your customers pay you. There are three main ways to fund that gap in Australia, and each suits a different kind of business.
- Invoice (debtor) finance advances up to around 85% of your unpaid invoices within a day or two, and grows as your sales grow. It usually needs no property security.
- A line of credit or overdraft gives you a limit you draw on and repay as needed. You pay interest only on what you use.
- A working capital loan is a fixed lump sum, assessed on the business and repaid over a set term. It's fast and often unsecured, and priced to match.
Which one fits depends on whether your cash gap follows your invoices, comes and goes unpredictably, or is a one-off. Below we explain each, what it costs and how to choose.
What working capital finance solves
Profitable businesses still run short of cash. You pay staff, suppliers and rent on a fixed cycle. Your customers pay you on theirs, often 30, 60 or 90 days after you've done the work. The bigger that gap and the faster you grow, the more cash gets tied up waiting. Working capital finance covers the gap so the business keeps running.
It isn't for buying an asset (that's asset finance) or property (a commercial mortgage). It's short-term funding for the day-to-day trading cycle.
Invoice and debtor finance
Invoice finance, also called debtor finance, frees up the cash tied up in invoices you've already sent. The financier advances a percentage of each invoice now and pays you the rest, less a fee, when your customer pays.
You can usually draw up to around 85% of the invoice value within 24 to 48 hours of issuing it. The fee is usually around 2 to 4% of the invoice, depending on your volume, how reliable your customers are and how long they take to pay. The invoices are the security, so you rarely need property. That's why it suits a growing business with no spare property to offer.
It comes in two types. With confidential invoice discounting, you keep chasing your own payments. With factoring, the financier does it. The facility grows with your sales, so you can draw more as you invoice more. That makes it a good fit when your cash gap comes from waiting on customers to pay. The invoice and debtor finance page has the full details.
Lines of credit and overdrafts
A line of credit is a limit you draw on as needed and pay back as cash comes in. You pay interest only on what you've drawn, not the full limit, so it suits a cash gap that's unpredictable or seasonal.
An overdraft is the same idea attached to your transaction account. A standalone line of credit does the same job without being tied to the account, and can have a bigger limit. Both can be secured against property for a lower rate, or left unsecured at a higher one. The lines of credit page explains how lenders set the limit.
Working capital loans
A working capital loan is a fixed lump sum, assessed on the trading business rather than a particular asset, and repaid over a set term. Unsecured loans can settle in days, because the lender assesses your cash flow instead of waiting on a property valuation. The catch is price: a fast, unsecured loan is priced for the risk the lender takes. It suits a one-off need with a clear amount, like buying extra stock before a busy season or paying a tax bill, more than an ongoing gap. The cashflow finance page covers the types of lenders and loans.
Invoice finance vs a working capital loan
The main difference is what each one is tied to. Invoice finance grows with your sales and is secured by the money your customers owe you. A working capital loan is a fixed amount, assessed on the business and repaid on a schedule, whatever you invoice. If your cash gap grows every time you win more work, invoice finance grows with it. If you have one specific need, a loan is simpler. Neither usually needs property, which is the main appeal of both for an owner who doesn't want to put up the family home.
Line of credit vs overdraft
Both let you draw and repay, and both charge interest only on what you draw. The practical difference is that an overdraft is attached to your transaction account and usually has a lower limit, while a standalone line of credit can be bigger and sits separately from your day-to-day banking. For a small, occasional buffer an overdraft is simplest. For a larger, ongoing facility a line of credit usually gives more room.
How to choose
No one option is best for everyone. The right one depends on the shape of your cash gap.
- If the gap follows your invoices and grows with sales, use invoice or debtor finance.
- If it's unpredictable or seasonal, a line of credit or overdraft means you pay only for what you use.
- If it's a one-off need with a clear amount, a working capital loan with a fixed term is simpler.
The headline rate is rarely the full cost. Fees, the advance percentage and how long your customers take to pay all change the real number, so read the true cost of a business loan before you compare offers. Lenders vary a lot in what they'll fund, and the categories of business lender that fund working capital aren't the same ones that fund property.
The regulatory frame
Working capital finance for a business is commercial-purpose lending, so it sits outside the consumer protections of the NCCP framework. The responsible lending and disclosure rules for consumer credit don't automatically apply to it. The broker's own disclosure does apply: how Aurelius Capital is paid, and any fee charged to you, is set out in writing in the Credit Guide before you commit. Aurelius Capital is a credit representative (560751) of Viking Money Pty Ltd under ACL 471435 (Viking Aggregation Pty Ltd), and disputes can be taken to AFCA.
If you want a broker's view on which option fits your cash cycle, and what it would actually cost, start with the application form.