Many businesses operate on credit terms, creating a gap between making sales and receiving payment. As sales increase, more cash becomes tied up in accounts receivable for 60 to 120 days while expenses still need paying. Debtor finance can provide a solution, but it’s not right for every business.
Debtor finance converts your unpaid invoices into immediate working capital. Two main types exist in the Australian market: invoice discounting and invoice factoring.
Invoice discounting releases up to 85% of your outstanding invoice value immediately. When your customer pays, you receive the remaining 15% minus the finance fee. Your customers aren’t aware you’re using finance, and you retain full control over debtor management. Invoice factoring works similarly in advancing funds, but your customers are notified that a finance company now handles payment collection.
Traditional bank financing often involves lengthy approval processes and using personal assets as security. Debtor finance provides cash almost immediately without requiring directors to pledge personal assets. The approval process focuses on the quality of your debtors and invoices rather than your trading history or balance sheet strength.
As your sales increase, so does your available funding. Unlike a fixed loan or overdraft limit, debtor finance scales with your revenue, making it valuable for businesses experiencing rapid growth.
Before implementing debtor finance, ensure you’re aware of the impact it has on your cash cycle. You receive approximately 85% upfront, but the remaining 15% doesn’t arrive until your customer pays, minus fees. This means you need to plan your cash flow around receiving less than the full invoice value. The fees need to be factored into your pricing and margin calculations. If your margins are tight, the cost of finance might erode profitability.
Debtor finance works particularly well for businesses selling to multiple customers on account terms, such as wholesalers, manufacturers, distributors, and service providers. The more diversified your debtor base, the better terms you’ll typically receive.
However, debtor finance isn’t suitable for every situation. If most of your revenue comes from one or two major customers, it becomes difficult. Businesses that work on retainers, receive progress payments, or get paid in advance don’t generate the type of traditional invoices that debtor finance requires. If your business operates on slim profit margins, the cost might make transactions unprofitable. If you already have adequate overdraft facilities at favourable rates, adding debtor finance might be unnecessary.
Beyond addressing immediate cash flow needs, debtor finance can support mergers and acquisitions, management buyouts, business restructuring, or seasonal peak funding.
Debtor finance isn’t inherently good or bad. It’s a tool that works well in specific circumstances. Before committing, work through the cash cycle implications with your accountant or financial advisor. Model exactly how much cash you’ll receive, when you’ll receive it, and how the fees affect your bottom line.
If you’re considering debtor finance or want to understand whether it’s suitable for your business situation, contact the Advivo team. We can help you model the cash flow impact, compare it against alternative funding options, and ensure you understand the full implications before committing.
