Debtor Financing overview
What Is Debtor Finance?
Debtor finance is a financing solution that allows a business to use its accounts receivable ledger as collateral for funding. Debtor financing is commonly used by invoice heavy businesses as a way to manage working capital.
Due to relatively high interest rates when compared on an annualised basis, a debtor finance facility is usually managed as a short term cash flow solution.
Generally, a debtor financing service will pay you up to 80% of your outstanding invoice value now, and pay you the balance after customers fulfil their payment requirements (minus a fee for providing the early money).
Debtor financing is broken in to two different classifications:
- Invoice discounting
- Invoice factoring
What Is Invoice Discounting?
With invoice discounting — you as the business will continue to manage the collection of payment from the invoiced customer.
A business owner will need to ensure dedicate time and processes are in place to follow up on debtors and their payment terms.
As invoice discounting involves some degree of trust on the behalf of the lender in the loan terms, the lender tends to be more likely to offer this solution to more established businesses with larger turnover from trusted debtors (e.g., large companies, or companies with a positive track record of debtor financing arrangements).
Clients are unaware of any invoice discounting arrangement.
What Is Invoice Factoring?
The other form of debtor financing is invoice factoring – where the lender takes over payment collection process on invoices due to the borrowing organisation. Invoice factoring organisations will therefore call and chase down the customer to request payment when the payment deadline comes up, as well as pursue any further collection processes (if necessary).
Invoice factoring allows the business owners to focus on other areas of the business and not chase payments of debtors. Clients will know that the business owner is using a factoring solution due to collecting their payments.
As invoice factoring is more labour intensive for the lending organisation, invoice factoring arrangements are often more expensive than invoice discounting.
The Pros And Cons Of Debtor Finance
✓ Greater Flexibility ✓ Improve Cashflow ✓ Tailorable Financing ✓ Discount Opportunities ✓ Improve Relationships ✓ No Property Security ✓ Improve Payment Terms ✓ Tax Deductions ✓ Maintain Control
X High Interest X Credit Rating Impact X Long Contract X Client Perception X Loan Eligibility X Lost Profit
Weighing Up The Pros & Cons
Every debtor finance facility and every business is different, but there are still some standard pros and cons for you to help you make the right decision.
Benefits Of Debtor Finance
Debtor finance enables business owners to solve their mismatched cash flow problems, giving them access to already earned cash. This allows businesses to pay important expenses in the present without fearing about low cash flow issues.
Debtor finance also allows your business relatively quick access to cash compared to other loan products and unlike other products is flexible and develops with your business as it is secured to the accounts receivable ledger - as a business grows its account customers, the ability to increase debtor finance facility also increases.
For organisations with poor account receivable processes, invoice factoring could be an easy solution to outsource and improve the collections process.
✓ Flexible access to cash as required Debtor finance provides convenient and flexible access to cash when you need it. Debtor finance is ideal for businesses that are growing quickly or need to take into account seasonal fluctuations.
✓ Improves your cashflow With debtor finance, you no longer have to wait for debtors to pay. You can improve your cashflow and access your money faster. It quickly provides financial stability, making it easier to manage fluctuations.
✓ Is tailored to your situation Unlike traditional business loans, debtor finance is specifically tailored to your businesses exact requirements. The amounts will vary depending on how your business is running so it is specific to your situation and needs.
✓ Creates opportunities to negotiate With improved cashflow, there are opportunities to renegotiate repayment terms. If you have suppliers, this is a good chance to discuss early repayment discounts that could further reduce business costs.
✓ Property security is not required Debtor finance does not require assets or property as security. Typically, no guarantors are needed. Instead, you offer your debtor ledger as security. This makes it easier for younger businesses and businesses without security to still access financing.
✓ Extend your payment terms With the help of debtor finance, it is easier for you to offer improved repayment terms to your clients. Debtor finance takes the worry out of cashflow, so you can concentrate on offering the best service to your clients.
✓ Lower your tax payments The principal and interest payments on your debtor finance are considered businesses expenses by the government. This means that they can be deducted from your business’s income when it comes to doing your taxes.
✓ Improve your customer relationships (Invoice Factoring) Letting your lender take over payment collection can help you maintain your customer relationships. By removing yourself from the debt collection process, you can concentrate on building positive personable relationships with your clients.
✓ You maintain customer ownership (Invoice Discounting) Invoice discounting allows you to manage the payment collection process. This confidential agreement between yourself and the lender means your clients are not privy to the financing situation of your company.
Drawbacks of Debtor Finance
Debtor finance is a specialised finance solution for organisations that sell products and services on payment terms. Other business forms that do not rely on accounts receivable would not qualify for this form of financing.
Debtor financing also tends to be more expensive compared to other products, and businesses tend to need to have to meet a certain level of revenue in order for a lender to agree to debtor financing.
Business owners choosing invoice factoring will cede overall management of their accounts receivable ledger potentially highlighting to their clients the lending and collections arrangement.
X Often have higher interest rates Your interest rate and total costs will be impacted by your cashflow, credit history, business credit rating, debt history and more. Depending on these factors, you may face a relatively high interest rate.
X It impacts your credit rating Each loan that you take out will be noted on our credit report which will impact your business credit rating. Depending on the terms of the lender you may find yourself paying higher interest on subsequent loans due to higher risk of continuous borrowers.
X Can have long contracts Depending on the lender and the financing terms, you may have to negotiate the length of the contract so that it works for your business.
X Can impact client perceptions (invoice factoring) When a lender is taking care of the payment collection process it could send a message to your clients that you are struggling financially. The communication and collection process should be handled well to avoid negatively impacting your brand.
X It could impact future loan eligibility Using your invoices as collateral can impact your ability to get more conventional business loans. You will not be able to use your accounts receivables as part of your collateral, which could negatively impact your chances of approval.
X Debtor finance costs you money The debt factoring service costs you money. While you may save some amount of time and potential costs by getting funds sooner, ultimately you are paying for this service and this will results in. loss of profit.
Are You Eligible?
Every debtor finance lender has their own eligibility criteria. Although you will find that many have some criteria in common. Our credit specialists work with over 70 lenders, so we can help you find the lender and terms that are right for your business.
- Australian Business
- Annual Turnover Of 200K+
- Trading For 1 Year+
- Run A Profitable Business
- Be Creditworthy
Reasons Debtor Finance Applications Are Declined
If you do not meet a debtor finance lenders criteria, your application may be declined. To avoid this situation, we suggest reviewing whether you fall into any of the below situations, and speaking to one of our loan specialists to see which lender will work best for your specific business situation.
- Poor credit score
- Outstanding debt
- Short trading time
- Weakening industry
- Inadequate cashflow
- Limited collateral
Applying For Debtor Finance
Applying for debtor finance is similar to applying for other loans in that you will have to provide business bank/financial statements. A large accounts receivable volume will be a determining factor here for any lender considering the provision of a debtor financing solutions.
You can start the application process online now via our loan wizard which will help you find the right debtor finance facility for your specific business. Alternatively, you can give our business loans specialists a free, no-obligation call on 1300 780 568 to chat about your business needs.
1. Provide Some Info Tell us a bit about your business and your debtor finance needs.
2. Compare Lenders See the loans and lender that you pre-qualify for and compare your options.
3. Apply Today Complete your application or chat with one of our business loan advisors.
How To Use Debtor Finance
If your organisation has a large accounts receivable ledger and as such, potentially falls into a temporary period of low cash on hand, a debtor finance solution could be your best response.
Due to the relatively high annualised rate of a debtor finance facility, it is often advisable to view debtor finance as a purely short term cash flow solution – viewing longer term finance solutions for other projects.
Debtor finance is often most useful in the early lifespan of a business when income stability is most critical. This is why debtor finance is so often used to meet day-to-day demands by bringing your cashflow forward.
- Managing ongoing costs
- For growth opportunities
- Managing seasonal fluctuations
- To get funding when banks can’t help
Frequently Asked Questions
Why would I use debtor financing? Businesses choose to use debtor financing so that they can access the cash that is owed to them immediately, rather than waiting for their debtors to pay them.
Is debtor finance right for me? Debtor finance is used by a range of businesses who may have a long lead time between invoicing and payment. These often include manufacturers, construction businesses, service industries, wholesalers, and growing businesses.
Do I qualify for debtor financing? Lenders want to provide debtor facilities to businesses who sell goods or services to other creditworthy businesses. They may also take into account your credit score, the age of your business, your cashflow and more. If you want to find out what facilities you may qualify for, try our free loan wizard. Answer a few questions about your business and discover which lenders could work best for you.
Do I need to provide security? Most lenders will provide the facility against the assets of your business, rather than requiring property. But this ultimately depends on the lender and your individual circumstances.
How do I apply? It is simple to start the application process, either use our free loan wizard to find the right facility or give us a call to chat about your needs. From there we can help you find the right lender, loan and rate and walk you through the application.
Can my startup get a debtor facility? Debtor finance is ideal for statups as it evens out cashflow helping them to grow. To find out if your business is eligible give us a call on 1300 780 568 to chat about your specific situation.