Debtor Finance: A cash flow friendly finance solution
Debtor finance is a financial product that works to improve your cash flow by funding slow-paying invoices. When the invoice is funded through debtor finance, it improves cash flow and frees up more cash for your business.
In business lending, there are a number of financial products from which to choose. It is important to select the product which is right for your business in order to improve your financial situation, rather than paying for a product that drains your financial reserves. Debtor finance is suitable for businesses that need help to cover expenses whilst awaiting pending payments from customers with long payment terms.
What type of business can qualify for debtor finance?
Debtor finance can be an ideal solution for small companies who are growing quickly, as it ensures they have the cash to run business-as-usual whilst awaiting invoice settlements. As it is tied to your sales, the facility can grow as your business does.
The most common industries who make use of debtor finance facilities are wholesale trade, manufacturing, property and business services, labour hire and construction.
In general, to be approved for a debtor finance facility your business should have creditworthy customers and be free of major legal or tax problems. As long as these criteria are met, the approval process for debtor finance is relatively simple.
How does it work?
Debtor finance works by providing cash against your invoices as security. The transaction structure varies slightly depending on which lender provides the financing, but a Lendfin specialist will help you to obtain the best deal for you. There are two main structures for debtor finance agreements:
- Invoice factoring. This is the more common type of debtor finance and involves financing each invoice individually. As soon as the invoice is submitted, the financier will advance up to 80% of the invoice’s value. Once the customer pays the invoice in full, you will receive the remaining balance of the invoice minus any fees and charges. A major benefit of invoice factoring is that the financier generally takes responsibility for credit collections.
- Invoice discounting. Rather than financing individual invoices, this method involves financing a batch of invoices. It works similar to a line of credit, with the limit changing as invoices are issued and paid. Collections and credit control is generally handled by the client (ie. your business), so invoice discounting is more suitable for larger companies.
So what are the benefits of debtor finance?
- Quickly improve cash flow. The acceleration in your cash cycle allows you to meet your business’ cash flow and ATO obligations on time.
- No security required. In most cases, your accounts receivable is the sole security required for a debtor finance facility. This makes it accessible for businesses in good financial standing but with no property or cash accounts.
- Flexible facility that can grow with your business. As your customer base (and therefore receivables) grow, so too will the potential limit of your debtor finance facility.
A debtor finance solution could allow your business to access quick cash against a percentage value of your cash receivables. If your business sells products on credit terms, debtor finance may just be the solution that is right for you. Contact a Lendfin specialist today to see how we can help with your business finance needs.