Invoice Discounting & Debtor Finance is perfect for a business offering trading terms of 30-90 days
No business enjoys being in debt - but having to chase payment from those owing you money is also a pain. Calling customers to remind them that payment for a certain product or service is due is never fun. If not properly managed, often customers will leave to find vendors with better payment terms.
Debtor finance is a good way to get cash quickly from outstanding receivables. In this article we will look at debtor finance also known as invoice financing. Here are 4 benefits of using invoice financing, plus advice on where you can find the best debtor invoice options in Australia.
In Australia, debtor finance is a term used for several slightly different financial instruments. To help understand the basics of this financial tool, let’s consider the following example: an online marketing, graphic design, and website creation company has around 150 clients they work with on a regular basis. They offer a complete service where they help clients set up a website and then manage online advertising, publicity, digital marketing channels.
They charge their 150 clients a monthly fee that varies based on the services provided. In order to keep their clients, many of whom are small business owners and start-up entrepreneurial ventures, the company offers net 30-60 day terms to pay the monthly invoices. While some of their clients pay immediately others who are less financially stable take several weeks or months to pay the invoices.
The business may struggle with lack of capital to cover worker’s weekly salaries, fund other business operating costs and manage ongoing business expenses. This lack of stable cash flow creates issues for the company. They may even consider taking out a traditional small business loan during particularly difficult months when the majority of their clients are waiting till the last minute to make their payments.
Debtor finance would enable this company to finance their client’s invoices, which is one of the strongest financial assets of the company. In most cases, the debtor financing company would advance 90% of the submitted invoices to the company as soon as those invoices come in. That company would then have the cash flow required to cover certain business expenses. Once the customer pays the invoice in full, the debtor financing company then sends over the remaining 10 to 20% of the invoice value, minus the fees they charge.
In some cases, the debtor financing company also offers credit and collection services which frees up time and resources. There are two main types of debtor financing; invoice factoring and invoice discounting. Invoice factoring is usually the best option for companies with high cash value but infrequent invoices. Invoice discounting is best for companies that have several, regularly recurring invoices for smaller amounts.
With this type of debtor finance, the batches of invoices are all financed together and the company essentially has a line of credit type financing. This line is then adjusted continually as clients pay off their monthly invoices.
There are several benefits that come with debtor finance, especially if your company suffers from cash flow problems due to late invoice payments.
Invoice financing or invoice discounting allows you to gain access to a larger base of clients. Many of your clients might demand a certain leniency in invoice payments, usually between 30-60 days. If your company doesn´t have the financial stability or the cash flow reserves to offer those conditions you could lose these customers.
Allows companies to effectively deal with cash flow problems associated with managing a large amount of invoices. This finance option allows you to avoid taking out other types of business loans at high interest rates and unfavourable terms and conditions.
Can help small businesses grow without taking on extensive debt through other loan options. Debtor finance is ideal for small and growing businesses wanting to increase their customer-base without sacrificing high debt to income ratios.
Lastly, and most importantly, debtor finance is often one of the most affordable finance options available to businesses. One great benefit is not having to pay interest repayments that would come with a fixed term loan or standard line of credit. Worrying about interest payments is taken out of the picture as financed invoices are repaid by your customers. It’s always important to know your rights so review your contract terms carefully.
Finding debtor finance companies or cash flow finance companies in Australia is certainly trickier than simply heading down to your local bank to apply for a standard business loan. While many traditional lenders might not offer this type of finance option, there are several online companies that offer debtor financing solutions for companies that operate via invoices. Ebroker.com.au offers a tool that will help you filter through all potential brokers and find the best debtor financing solutions in Australia.
For more than 25 years, Scottish Pacific has been helping business owners to achieve their aspirations and improve their cash flow with innovative funding solutions.
Marketlend performed extensive research in the Australian Business lending market and as a result was established to fulfil a real need for both investors and borrowers alike.
Ambitious businesses cannot reach their potential because banks will not fund them without real estate backing. InvoiceX offers a viable alternative.
We offer a range of flexible loan products specifically developed to assist businesses with working capital requirements and temporary cash flow problems.
CashFlow Advantage stands out by being a financers that still endeavours to go above and beyond for our clients – no matter what.