Buy Now Pay Later (BNPL) is a rapidly growing solution for consumers to purchase goods and pay for them at a later date. It works because retailers get their money sooner, and customers get their goods or services sooner instead of waiting to save the cash upfront. The concept simplifies the financing side of the equation as consumers don’t have to pay off a separate loan or credit card – the payment for the purchase is just taken in instalments over time, without interest.
How does this concept apply to businesses selling to each other? Most B2B (business-to-business) sales models rely on selling goods or services on credit or with payment terms. An invoice is issued, and the customer (purchasing business or debtor) is required to pay by the due date. The creditor (selling company) must wait for the customer to pay before receiving their funds. This lag in payment creates an incentive for an alternative solution to bridge the gap, other than a separate business loan or similar.
Introducing debtor finance, a solution that uses issued invoices as security for funding. Two common forms of debtor finance are invoice factoring and invoice finance. We’ll explore both below, as well as what to look out for when selecting a provider.
What is invoice factoring?
Debtor finance is an alternative to taking out a business loan or using the equivalent of a consumer credit card. Legitimate invoices issued to your customers are legal obligations to pay you for your goods or services within your agreed payment terms. Debtor finance providers allow your business to draw funds against these outstanding invoices shortly after they are issued. In any of its forms, this type of finance is essentially a revolving line of credit. This means that your business can access approved funds when necessary (without offering additional security), and the funding you can draw from fluctuates as your business’ sales do (making it a scalable solution to support your growth).
Invoice finance and invoice factoring are both similar facilities in that they provide businesses with cash using their accounts receivable as collateral. Apart from this, they are notably different in a few ways. The factoring company purchases your unpaid invoices for an upfront payment, slightly less than the invoice totals. Invoice factoring is an agreement that therefore requires your business to give the factoring provider agency over the collections procedure with your B2B clients. These clients will know of the arrangement and be aware they must engage with the factoring company when their invoices are due. While invoice factoring outsources this process, it’s also a downside for some businesses that want to maintain complete control over the relationship with their B2B clients, including the receivables process.
What is invoice finance?
Invoice finance also lets your business collect invoice payments upfront without waiting for clients to pay. Although, instead of selling the invoices and outsourcing the relationship with your customers to the factoring company, your business creates a working relationship with the invoice finance provider while maintaining the one with your clients.
An invoice finance facility will pay you cash upfront within 24 hours of issuing your invoices to your B2B customers, usually 80% of the amount. When the customer makes their payment, the rest will be released, minus a small fee. Both solutions allow your business to raise the capital you need to pay for your expenses and invest in growth without requiring it upfront or using additional personal assets or property for extra security.
How to find a good debtor finance provider
Finding the right debtor finance provider to help your cash flow can be tricky if you don’t know where to start or what to look for. Similarly to the many consumer Buy Now Pay Later offerings, there are many debtor finance providers, and the industry is still growing in Australia. With plenty of options to choose from, it’s natural that some will be a much better fit for your business than others.
Each business and industry is different, and each facility has varying terms and conditions. Do you know if the provider has a good reputation? Do they have a quick and easy digital funding process? How is their customer service? Debtor finance brokers are experts with experience in selecting the right debtor finance provider for your business and unique circumstances.
Capital Plus Finance is an experienced debtor finance broker with a panel of many trusted debtor finance providers to select from. The Capital Plus Finance team will do everything we can to help you qualify for a suitable solution to unlock capital from your customers’ outstanding invoices. Please give us a call anytime to find out more or to have an obligation-free chat about your situation.