What is debtor finance and how it works? Essentially, a company providing products or services and raising invoices can get an advance on the monies owed by utilising debtor finance. If your firm has a long working capital cycle and needs money to keep it rolling, then debtor finance may be suitable.

Benefits of Debtor Finance

Debtor finance offers many benefits as opposed to a traditional loan. Firstly, you’ll receive money a lot quicker than a loan which would involve a lengthier process. As a business grows and its invoice ledger increases, debtor finance provides access to this as a source of funds to bolster working capital.

Additionally, debtors have more control over their cash flow compared to a loan or overdraft, usually limited by the amount of attached security. For example, if a business had a $200,000 overdraft limit but needed more funds, it wouldn’t be able to go over that. But with debtor finance, it may be possible to access $320,000 if it has $400,000 in outstanding debtors.

A hidden advantage is that debtor finance encourages better habits within a business too – such as improved credit control. Knowing that they are bound to certain requirements of the funder, clients tend to pay more attention to their paperwork, invoicing and collections, rather than just raising an invoice and hoping for payment on the due date.

What Types of Businesses Suit Debtor Finance?

Not all industries are necessarily appropriate for debtor finance, such as those with contractual obligations. When studying the ledger, a financier will quickly determine if debtor finance is unsuitable. However, industries like transport, manufacturing, wholesale and the fashion industry are well suited to debtor finance.

The terms ‘Invoice Finance’ and ‘Cash Flow Finance’ are often used interchangeably, however, they mean slightly different things. Invoice Finance (or debtor finance) is specifically when you are funding invoices. Cash Flow Finance, meanwhile, is a more general term for any type of financing that aids with cash flow; including debtor finance, Trade Finance for importing/exporting and Supply Chain Finance.

For example, if a business has a lot of high-value contract work with authorities such as local councils who usually take up to fifteen days from invoice to pay, debtor finance may not be suitable as there are contractual clauses. In this case, Supply Chain Finance could be a suitable option as it allows for the purchase of raw materials 3 months in advance before commencing the work.

When it comes to applying for debtor finance, the type of customers a business has can have an impact. If they have governments or Blue Chip companies as clients, finance companies would generally lend money as this reduces the risk of payment disputes. On the other hand, if a company has a lot of small businesses and low-value invoices in their ledger, the funder might not be interested or charge a considerable fee to handle and manage these accounts.

Why debtor finance is so useful

Debtor finance also plays a key role in business turnarounds. We often see it employed when implementing a finance or debtor finance facility. Many firms are restricted by their overdraft limits, so they cannot rely on it for working capital. However, debtor finance helps release much-needed funds back into the business so managers can make decisions more freely.

The type of debtor finance you choose will depend on the size and types of your business clients. If you have larger businesses as clients, then it might be worth considering a long-term option such as debtor factoring. This means that your business can get an advance on all its invoices, with a lump sum paid upfront. However, if you have smaller businesses as clients, then a more short-term solution such as debtor financing may be appropriate.

What to look out for when applying for debtor finance

When looking into debtor finance, it’s important to consider the fees associated with it. Depending on what type of finance you use and the size of your clients, the fees involved can vary significantly. It’s also worth considering that banks typically charge a much higher rate for debtor finance services than other finance providers. It is important to shop around and compare the fees associated with different providers before making a decision.

It is worth noting that the security provisions required by debtors are usually considerably different to those required by lenders. Generally, these requirements are less stringent; however, the financier is often obliged to take some form of security over your invoices to secure their monies. In situations where you have a large number of relatively low-value invoices, this can be a problem as the lender would require additional security over those invoices.

Debtor finance can also provide access to working capital quickly. Most invoices are settled within 48 hours which is often much quicker than obtaining money through a loan or overdraft facility. This makes it a great option for businesses that need to make quick decisions. For a debtor finance transaction to be successful, both the lender and the borrower must agree. The lender needs to understand how the borrower operates to mitigate potential risks and cash flow problems. On the other hand, the borrower needs to be open and transparent about their financial position for the lender to approve the loan.

Choosing a Lender for Debtor Finance

When choosing a lender for debtor finance, it’s important to do your research. Some lenders may offer a lower interest rate but will require a greater percentage of the outstanding debt as collateral. It’s important to assess the terms and conditions of the loan carefully, to ensure that the loan is beneficial to your business in the long run.

One of the benefits of debtor finance is that it can provide businesses with access to money quickly. However, it is important to remember that borrowing funds carry some risk. As a business owner, it is important to be aware of the potential risks associated with borrowing money and to ensure that all of the conditions of the loan are met.

It’s important to remember that debt finance is not suitable for all businesses. If you owe large amounts of money to a few customers and don’t expect payments within a reasonable time frame, then debtor finance may not be suitable for you. Additionally, it may not be possible to use debt finance if your business has seasonal cash flow problems or is only expected to be generating revenue for a limited period.

It’s clear that debtor finance can provide businesses with significant advantages, particularly when it comes to accessing funds quickly. However, as with any type of loan, there are also risks associated with debtor funding. Therefore, businesses must consider all aspects of debtor finance before committing to any agreement. This will ensure that they benefit from the advantages while also minimising the associated risks.

Capital Plus Finance is an experienced business loan broker that has your best interests at heart. Choosing the right finance facility for you is what we do, ensuring you receive flexibility, fast approval and great service. With a panel of many lenders, The Capital Plus Finance team will do everything we can to help you qualify for a suitable solution for your business. Please give us a call anytime to find out more or to have an obligation-free chat about your situation.