Debtor Finance (Cashflow Finance) Guide for Businesses

Debtor Finance (also called Cashflow Finance) can have significant benefits for both small and larger businesses, by providing a flexible line of credit based on outstanding invoices.

Most businesses who sell their goods or services to other businesses offer credit terms of 30 days or more in order to secure orders from customers. Practically, these invoices can take up to 60 days or more to be paid. This delay reduces the business's cashflow, and can limit the growth of the business.

Read on to find out what Debtor Finance is, how it works, and the benefits of Debtor Finance for a wide range of business types and sizes.

What is Debtor Finance?

Debtor Finance, also known as Cashflow Finance, Invoice Factoring and Invoice Discounting, allows businesses to access funds owed to them in outstanding invoices before the debtor actually pays.

Debtor Finance provides a business with quick access to up to 90 per cent of the funds owing in outstanding invoices, with the remaining percentage paid when the customer pays the invoice.

How Does Debtor Finance Work?

As a business delivers goods and services to its customers, the invoices (trade debts) raised are forwarded to the financier. The financier then verifies the invoices and advances up to 90 per cent of the unpaid invoice value within 24 hours. The business can then access the available funds as required.

The remaining percentage of the invoice is paid to the business once the customer invoice is paid in full, less a small fee.

The business can retain control of the accounting and collections functions, or they can opt for the financier to control this function as part of a full service solution. Most Debtor Finance financiers offer online access to reporting, allowing the business to track payment receipts.

Types of Debtor Finance

There are two main types of Debtor or Cashflow Finance:

  • Disclosed: the debtor or customer is notified on invoices that funds should be paid directly to the financier. This is generally known as Invoice Factoring.
  • Confidential: the debtor or customer is unaware of the funding being provided. This is usually called Invoice Discounting.

Invoice Factoring

Invoice Factoring is a disclosed finance facility (the business's customers are aware of the finance facility) designed to improve a company’s cashflow by turning invoices into working capital. It provides quick access to up to 90 per cent of the value of verified invoices. The remaining balance (the retention), less charges, is made available to the business once payment is received from their customer. This facility is a recourse facility.

Invoice Factoring is commonly provided as a full service solution, with debt collection, sales ledger administration and reporting provided to businesses who do not have their own credit management resources. The financier's professional debt collection services are able to assist in collecting debt promptly and efficiently. However, with a factoring agreement in place it is still possible for a business to continue managing their own debt collection if desired.

Invoice Discounting

Invoice Discounting is a confidential finance facility (the business's customers are unaware of the finance facility) designed to improve a company’s cashflow by providing funding against the company's outstanding receivables. It provides quick access to up to 90 per cent of the value of the approved invoices. The remaining balance (the retention), less charges, is made available to the business once payment is received from their customer. This facility is a recourse facility.

Invoice Discounting is commonly used by established businesses that have an in-house collections or credit management department These businesses manage their own collections and do not need the financier to collect invoices for them.

Businesses taking advantage of Invoice Discounting may not need all invoices funded, and may only use it as a type of overdraft facility for significant stock purchases or wages. Invoice Discounting allows a business to set limits on the amounts drawn down to control interest costs.

Generally, as long as the account is well-managed, only the business and the financier are aware of the Invoice Discounting facility.

Who is Eligible for Debtor Finance?

Debtor Finance is designed for businesses providing goods and services to other businesse on credit terms.

To be eligible for Debtor Finance, invoices must be business-to-business sales on credit terms. Invoices to private (non-business) customers, or invoices on non-credit (for example, COD) terms are not eligible for Debtor Finance. All eligible invoices must be for goods and services that have been delivered in full.

Benefits of Debtor Finance

Debtor Finance offers a range of benefits for a wide range of business types and sizes including:

  • Flexibility - the Debtor Finance facility limits grow in-line with sales.
  • Improved cashflow - sales are quickly converted into available funds - generally within 24 hours.
  • Negotiating power - businesses can negotiate better trading terms with suppliers, taking advantage of prompt payment discounts and bulk-buying ability
  • Eliminate payment discounts - eliminate the need to offer prompt payment discounts to customers. Debtor Finance fees are often less expensive than prompt payment discounts. Additionally, Debtor Finance provides greater certainty of funds being received.
  • Retain business equity - access funds for business expansion, including equipment purchases, through Debtor Finance rather than selling business equity.

Invoice Factoring can assist businesses:

  • To improve credit management and reporting
  • That may not qualify for traditional banking products
  • That have traded positively or negatively
  • With a strong or weak balance sheet position
  • That are trading out of difficulty with creditors

Invoice Discounting is particularly suited to businesses that:

  • Have traded positively and have a positive net assets position
  • Already have credit management and reporting procedures place
  • Are trading without current major creditor issues