Debtor Finance

Debtor finance is a form of business funding which allows companies to overcome the cash flow issues that may be holding them back. When a business provides a good or service, they must wait for their invoice for those goods or services to be paid. That wait is a cash flow gap which may turn into a bigger issue if the business is unable to support itself until it receives the debtor payments it is owed.

Debtor finance helps to bridge those cash flow gaps. It does this by way of a cash advance or a business line of credit which is secured against the value of outstanding invoices on a business’ accounts receivable ledger. This type of finance is available for any solvent company in Australia.

A fixed-term business loan, by comparison, is a lump sum amount usually secured against tangible assets that a business owns. Repayments for a business loan need to be calculated into business expenses as an additional pull on working capital. If the loan has been secured to help cash flow problems and the business does not grow to accommodate the repayments on that loan, cash flow problems begin to compound.

The amount of finance which a business receives when they use a debtor financing facility is calculated on the value of their current and outstanding invoices or, in other terms, their future expected income. When an invoice is paid, the credit amount owing automatically reduces. In this way, debtor finance products usually align more closely to the value of a business’ future income and can, as a result, greatly reduce the company’s strain on cash flow resources.

And cash flow is a big issue for our businesses here in Australia. Cash flow refers to the total amount of money being transferred into and out of a business and poor management of those funds is the number cause of insolvency for otherwise healthy and profitable businesses.

When a business supplies a product or service, it issues an invoice to its customer. There is an agreed upon waiting period for payment of that invoice (usually 30 to 60 days) and while a business is waiting for that cash to come into its accounts, it is essentially operating out of pocket. Generally, payment terms here are lower than the regional average (25 days) but 84% of Australian businesses report late payments from their B2B customers. The cost of chasing those unpaid invoices can amount to $15,000 per year which means that not only are Australian businesses experiencing cash flow gaps waiting for their invoices to be paid, they are also being forced to spend more chasing those payments.

Most small businesses in Australia will generally turn to more commonly used and popular financing products like a business loan or an overdraft facility to help them manage these cash flow gaps. Debtor finance, however, offers an alternative type of finance with credit terms more suited to growing businesses.

So why aren’t Australian business owners using debtor finance facilities? Our international counterparts see debtor finance as a regular part of business with the sector accounting for 15% of the UK’s GDP, versus 3% in Australia. The reason Aussie business aren’t on board is more likely down to awareness and availability.

Understanding how it all works can seem a little complicated at the start. For example, debtor finance goes by many names including accounts receivable finance, invoice finance and receivables finance, but they are all generally referring to a form of cash flow finance that is offered and secured against the value of invoices already accrued and waiting to be paid. Within the term ‘debtor finance,’ there is even more jargon to be understood like invoice discounting and debtor factoring or invoice factoring.

How does debt factoring work?

Factoring and Discounting

To simplify things, all you really need to know is that there are two main types of invoice financing. At first glance, they appear to be really quite similar and what they share in common is.

  • They both help solve working capital problems, usually caused by the payment terms on invoices (often 30-60 days).
  • The amount of available funds increases with the growing business.
  • Funds are available quickly, usually within 24 hours.
  • The application process will focus on the creditworthiness of the applicants' debtors as much as the business itself.
  • A proportion of the invoice will be advanced followed by a rebate (less any fees and charges) once the invoice is paid.
  • Generally, the entire accounts receivable ledger is funded by the finance company. Although a type of factoring (known as spot factoring) allows for single invoice / customer funding.

The key difference between these types of debtor finance is that when a business chooses invoice factoring, their unpaid invoices are sold to the factoring company who then takes over responsibility for collections. With the more confidential invoice discounting, the invoices are used as security for a loan or line of credit. The lender stays in the background and the debtors are usually unaware of the finance facility at all.

Both have positives and negatives and often it depends on the type and size of the business when it comes to choosing which is the right option. Let’s look at the pros and cons:

Pros and cons of discounting

ProsCons
Quick access to working capitalUsually suited to more established companies
The credit limit increases as the invoice ledger doesUnlike factoring, no help with collections (can be a pro and a con)
No fixed assets as collateralAll invoices are usually funded, leaving little flexibility
Non-disclosed so client relationships remain with the businessAvailable funds limited by the value of invoices
Short term option without long contracts
Cheaper than factoring

Pros and cons of factoring

ProsCons
Quick access to working capitalMore expensive than discounting
The credit limit increases as the invoice ledger doesAvailable funds limited by the value of invoices
No fixed assets as collateralStringent terms and conditions leave little flexibility (often 24 months contracts)
Help with credit control and admin is useful for small business ownersIt exposes your financial situation to your customers
Available to smaller, less established businessesIt comes with a somewhat negative reputation

The Waddle Difference

Waddle offers the best of both worlds. We are not factoring or discounting facility, but a modern form of invoice finance. We've built an innovative receivables finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.

Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.

It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital with minimal fuss. Get an offer now!