What is Debtor Finance and how does it work?
Debtor Finance HISTORY
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 a tax 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?
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
Debtor finance success story
“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
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.