Debtor Finance & Cashflow Funding

Debtor Finance - also known as Cashflow Finance, Invoice Discounting and Invoice Factoring - comes in many different variants.

All have one basic feature - funds are advanced to a certain percentage (usually 80-90%) against debts owed to a business for goods or services supplied on credit to other businesses.

For example:

  • Business sells book debts to Debtor Finance provider on a continuing basis.
  • Up to 80% of debt paid within 24 hours.
  • Balance (20%) of debt paid when debtor pays.
  • Recourse after 90-120 days.
  • Creates a flexible Line of Credit - grows with business.

Benefits of Debtor Finance

The biggest benefit of Debtor Finance is that it accelerates cashflow. Normally the money it costs to produce a good or provide a service is tied up in debtors and is not available for the business to use until payment has been received.

Through Debtor Finance, cash becomes available well before the debtor actually pays.

The extra cash has traditionally been used to purchase more stock, hire more staff or advertise to grow the business, but it can be used for any purpose the business wishes.

Additional benefits of Cashflow Finance include:

  • Take advantage of supplier discounts. Many suppliers offer discounts of 5% or more for payment within 7 Days. This discount more than offsets the cost of factoring.
  • Remove some of the debtor's power in the relationship. The client is much less at the mercy of the debtor in regard to payment.
  • Avoid offering debtor discounts. Some very large corporations take a significant discount, e.g. 5% on payments for 14 days. In many cases Debtor Finance is cheaper.
  • Allows the business owner(s) to keep a greater share of their equity as a business grows. All debt lenders will cap the amount they will lend to a proportion of the assets value (whether it be the businesses or the owner's own personal assets). Thus, if a business reaches this ceiling, the shareholders must source funds elsewhere. By using funds released from their debtors, they do not have to forgo any equity by bringing in extra capital from outside the business.
  • Assist with mergers and acquisitions. Another aspect of invoice factoring that is widely used in the USA, but is only now starting to be used in Australia, is as an instrument in acquiring another company or a management buyout.