What is Debtor Finance and how does it work?
Debtor finance, invoice finance and invoice discounting are all variations of the same financial service. Put simply; by using debtor finance, businesses gain access to the funds from their accounts receivable sooner. This in turn, leads to better cashflow and more working capital for the business to sustain and grow.
Debtor Finance in Australia
The concept of borrowing against invoices has certainly stood the test of time, with the origins of finance models like debtor finance traced back to England in the 1400s. But although the use of debtor finance is increasing in Australia and New Zealand; in terms of awareness, we are still some way behind other countries. In other markets, debtor finance is often a core product offered by banks, with many second-tier lenders in the market too. In the Tasman however, the awareness of products like invoice and debtor finance and until has paled in comparison to traditional bank funded lines of credit such as loans and overdrafts. But as we are now seeing more than ever, the constraints of traditional lenders can prove limiting for SMEs looking to fund operations, speed growth and assist with cashflow fluctuations.
In the wake of Australia’s 2017 Banking Royal Commission, the finance industry is seeing Aussies look beyond traditional funding avenues for more flexible solutions that are better suited to their business needs – a move reflected in the growth of our industry. In New Zealand, we are also seeing strong demand for new funding models as accessibility to bank finance continues to diminish. Debtor finance is fast becoming the solution of choice for many SMEs, primarily due to the flexibility and control it affords users, but also the quality of the products available, with financiers ranging from major banks right down to niche offerings.
The importance of cashflow
Cashflow is critical to the success of small business. Businesses need cash to operate; pay employees, purchase or hire equipment, distribute their product – as well as cover rent and utility costs. They also need capital to invest and grow. Often businesses experiencing rapid growth will run into cashflow issues because they have exhausted their lines of credit, already mortgaged their house or built up an ATO debt.
Many businesses find themselves in the back-breaking position of waiting 30, 60 or even 90 days for their invoices to be paid. They may have employed a larger labour force or hired equipment, but have outstanding invoices compromising their cashflow. This can put enormous strain on the business, often compounding debt as well as stress.
Is debtor finance right for your business?
A debtor finance facility is ideal for businesses that experience long lead times between starting the project (including upfront purchasing and hire costs) and issuing the final invoice on completion of the work. Typically, industries such as infrastructure, transport, manufacturing, wholesale and government regularly experience this delay.
Additionally, your business may be experiencing a period of rapid growth; taking on a new business opportunity or winning a big new contract. Debtor finance offers a way to receive payment from your invoices as soon as they are approved. Some debtor finance solutions will fund the entire ledger of the business, whereas some such as Apricity Finance, can allow you to choose which invoices you want to fund and at what level – up to 95% in our case.
Either way, the business is advanced a percentage of money against their invoice that will be paid at a later date. This means you get funds back into your business (and back to work), sooner. When your debtors have been assessed as viable upfront by Apricity, your business receives payment straight away.
When a debtor finance solution can help
Imagine your business has just won a big contract. You need to hire more staff, buy some additional equipment and invest in a storage facility. You must also maintain your obligations to existing staff and customers. You are a relatively new player in the market and the bank will not increase your business loan. Your new client however, is a large mining company and can be defined as a ‘high quality’ debtor, meaning lower risk to the financier. You have the opportunity to turn your unpaid invoices into cash (as soon as they are approved), meaning you can get working capital back into your business faster, steadying your cashflow and allowing you to meet your existing, as well as your new obligations.
Debtor finance success story
At Apricity, we strive to help our clients maximise their business potential through debtor finance. This is what one of our team had to say about helping our client:
“Our client operates a bulk haulage business, transporting aggregate and fill for two large infrastructure companies, as well as a number of other smaller clients.
Cashflow issues arose due to the erratic scheduling needs of their clients. Day to day the business needed to pay their drivers, hire trucks to meet demand as well as accommodate fuel and maintenance costs, but the long payment terms of their larger clients meant they were constantly dipping into their overdraft.
Their significant overdraft and business loan put them in the ‘high risk’ category at their bank and therefore their capacity to borrow more to fund their operations and growth was limited. The business was also very wary about getting into further debt and had started to turn down opportunities. The quality of their two large infrastructure clients however, meant that they were an excellent candidate for debtor finance. Apricity Finance was able to offer immediate help to the business by funding invoices from their larger debtors, freeing up working capital and helping the business onto a more positive footing.
Since the relationship began, the revenue of the business has more than doubled. Better cashflow has meant the business has had the confidence to take advantage of larger opportunities – without worrying about how to pay for additional costs, staff and equipment. The business now has less need for their overdraft facility and has no need to take on further debt.”
Read more Apricity case studies here
Invoice Factoring and Invoice Discounting
Invoice finance can be split into two offerings, invoice factoring and invoice discounting. There are a number of similarities between the products; the main being that they both leverage the unpaid invoices of a business to solve cashflow issues – either with the financier funding the entire accounts receivable ledger or single invoices.
The difference is that when a business chooses invoice factoring, their unpaid invoices are effectively sold to the financier or factoring company who take over the responsibility of the entire ledger, including chasing payments. With invoice discounting the financier will advance a percentage of the face value of an invoice speeding up payment times but does not take ownership of chasing the invoices to get paid.
Apricity Finance – Why Choose Us?
Our product is selective invoice finance – a debtor finance solution that allows business the flexibility to choose which invoices to fund, when and at what percentage (within prescribed limits). A reliable debtor finance facility can have a stabilising effect on the cashflow of your business. Rather than being under the cloud of servicing a debt, you may find you are in better control of your financial situation, obligations can be met, and the long term can be planned for.
Find out more about the types of Invoice Finance available