Could Debtor Finance Solve Your Cash Flow Concerns?

Jacob Overs

Wednesday, 07 September 2016

Debtor finance is a business loan solution that unlocks the cash in your unpaid invoices. If you’re invoicing your clients on 30, 60 or 90-day terms, it’s a long time for your business to wait before being reimbursed for the product or service you’ve provided. Some lenders will provide loans on the basis of these invoices so that you get access to the funds faster.

You may be offering longer terms in order to keep your clients happy, or perhaps you’re servicing a larger client and they have standard terms. In either scenario, it can squeeze your ability to run your business efficiently and can impact your ability to grow.

At this point, you might be wondering:

  • Will there be enough money for wages and rent?
  • Should you still plan the marketing activity for the upcoming quarter?
  • Should you still recruit new business units, such as design?

It can be a balancing act. Although longer payment terms aren’t ideal, your business needs customers in order to grow and you don’t want to risk losing your best clients.

One way to address your cash flow concerns is to explore debtor financing options; it’s available to businesses of all sizes.

What is Debtor Finance?

Debtor finance is a way for businesses to improve cash flow by using accounts receivable (or incoming sales invoices) as collateral (i.e. security) for the loan.

What this means in practice, is that if you have a book of invoices that is owing to you, then you could use the invoices as security to get funding. Think of debtor finance as an IOU to a lender based on your clients’ IOUs to you.

Break it down for me

Debtor finance is split into two areas:

  1. Invoice factoring
  2. Invoice discounting

Invoice factoring is where you enter into an agreement with the lender and they take active control of your outstanding invoices and even chase customers for payment. This may not be ideal if you want to maintain control of your customer relationships.

Business owners are typically offered invoice factoring by a lender in order to ensure the quickest settlement of the outstanding accounts receivable ledger. This puts the lender in the driver’s seat and they can chase the customer for the cash. This approach can be positive for time-poor business owners who want to limit the time spent chasing down invoice payments and spend more energy on core business activities.

Invoice financing is where the lender provides a cash facility in order to bridge the business’ credit needs. Customers will be unaware of the debtor finance relationship with the lender because you maintain the responsibility of chasing the customer for invoice payments. This might be the preferred option if you don’t mind spending the time chasing invoices because you see it as part of the overall customer experience.

You may not always get a choice between invoice factoring and invoice discounting. Some lenders will only offer invoice discounting to larger, higher volume businesses with a strong client base.

How can debtor finance help my business?

Debtor finance is a welcome relief for businesses that are reliant on customers paying their invoices on time. The lender only takes collateral over your accounts receivable, allowing you early access to money that you’ve been promised by your customers. This unlocks more capital for the everyday running of your business.

Another positive is that debtor finance allows more organisations access to finance, even if they don’t have traditional collateral such as property, equipment or vehicles. Debtor finance does attract a fee from the lender, where you pay interest for early access to the capital, and the rates are dependent on the business’ qualification and risk criteria.

If you want to explore your loan options, the Valiant in-house team of credit specialists can guide you through the process. With over 60 lenders across a range of products, Valiant maximises the business owner’s finance solutions while streamlining the process of applying.

Jacob is the Director of Sales here at Valiant. He has a wealth of experience in helping small business owners with their everyday finance needs, and is our go-to guru for all things working capital.

Related Posts

How to fix bad credit: 7 top tips

A successful finance application starts with a healthy credit score. Click for seven practical tips to improve yours today.

What will work-life balance look like after the pandemic?

Does working remotely work? The stats are in! Here’s how our idea of work-life balance has changed, and whether it will stick.

Should you freeze your repayments? Pros, cons and considerations

Finances hit hard by Covid? Click to learn more about hitting pause on your mortgage repayments, and other ways to relieve financial pressure.

5 Ways to keep your team motivated (and productive) while WFH

Who saw 2020 turning out like this? No one. But that can only damper our spirits for so long.

Coping with COVID-19 and changing business needs

COVID forcing you to rethink your business model? Here are five practical steps you can take to cope with new challenges and changing needs.

What the Government’s response to COVID-19 means for your business

While no one planned for COVID-19, there’s a plan in place to keep SMEs afloat. Here's what you need to know.

Don't Let Small Business Setbacks Get In The Way Of Success

A minor setback can be challenging, but there's no reason to let it derail your business goals. Here are a couple of coping strategies to keep you moving.

Applying for a business loan? Be ready to answer these 4 questions

Put your best foot forward by preparing strong answers to these 4 questions.

How To Find A Great Loan For Your Small Business

A little preparation goes a long way. Get ahead on the finance front with our quick tips to help you with the 3 key areas of your loan application.

What Does Your Credit Score Mean For Your Business?

Cut through the confusion. There's so much talk around credit scores and what they mean; it can be hard to seperate fact from fiction.

Getting Your Business Finance Ready by James Carey

The time arrives in most small businesses when you’re required to borrow money. So, how do you get 'business finance ready'?

What Accountants Need To Know About The Online SME Lending Market

We sat down with Neil Slonim, The Bank Doctor, to find out what he thinks about Australia's fast-growing online SME lending market.

Case Study: Mark’s Wholesale Steel Business

Finding the right business loan doesn’t have to be difficult. See how we helped Mark’s Wholesale Steel Business find the right business loan for them.

Take Your SMB Marketing Strategy To The Next Level in 2018

How do you attract new customers to your business? Where do loyal customers come from? It all starts with your SMB online strategy.

Making The Leap: Transitioning from PT to Gym Owner

The path from personal trainer to business owner can be both challenging and rewarding. Check out our top tips for making the transition.

How To Get Your Business Set-up on Social Media

Want to reach your customers online? Are you ready to digitise your small business? First up: get smart about social.

How To Handle Complaints With The Service Recovery Paradox

Don't let angry customers stay angry. Protect your business' reputation with these simple tips and tricks for delivering exemplary customer service.

How To Find The Right Loan For Your Small Business

Every business is unique. Every business loan is different. What features are most important to you? Consider these 4 things before applying for finance.

Ready To Take Your Business Global?

Have you explored your trade finance options? Premiering your business on the world stage may be within reach.

Don't Get Caught Out: Top Tips For Smart Inventory Management

Your guide to smart inventory management for every season.

3 Great Ways To Drive Sales Through Customer Loyalty

Get more customers and keep them. Here's the low-down on setting up your very own customer loyalty program.

How To Compare Business Loans Across The Market

You've explored your business finance options. What do you do next? How can you be sure you're comparing loans effectively and getting the best deal?

How To Make Great Hiring Decisions For Your Small Business

Want to expand your team but don't know where to start? Here's our guide to hiring great employees, featuring tips from industry leaders.

How To Develop Your Unique Selling Proposition

A Unique Selling Proposition (USP) is fundamental for any business looking to grow. Learn how to develop your USP and stand out from the crowd.

Could Debtor Finance Solve Your Cash Flow Concerns?

Are you invoicing your B2B customers with longer payment terms? Is it hurting your cash flow? Debtor finance could be a lifesaver between payments.

Here's What Working Capital Can Do For Your Business

With so many business finance options to choose from, how do you know whether working capital is right for your business? Start by reading this.

Time To Refinance? Here's What You Need To Know

Are you ready to refinance? Reviewing your business loan every 2 - 3 years can save your SME a lot of money. Here's what you need to know.

7 Tips For Managing Business Debt

2018 is your year. Here are 7 quick tips and tricks to get back in the driver's seat when it comes to battling business debt.

19 Business Funding Mistakes To Avoid

Improve your chances of locking down the perfect business loan. Here are 19 business funding mistakes to avoid when you're applying for commercial finance.

12 Business Set-Up Costs You Need To Know About

Setting up a business is hard enough, without getting stung with unexpected costs. Here are the things you should be thinking about before you dive in.

5 must-ask questions when applying for a small business loan

Getting the best rate is all about asking the right questions. Have you done your research? Here's where to start and why.

Part 2: Claiming The R&D Tax Offset

"Ok, I'm eligible for the R&D tax incentive. But how do I actually claim it?" Here's what you need to know.

Part 1: Are You Eligible For The R&D Tax Incentive?

You could be missing out on a tax offset of 45 cents in every dollar. Check your eligibility for the R&D tax incentive today.

Debt Or Equity: What's Best For Your Business?

Need to raise cash for your business? We explore the use of debt versus equity, and how to decide which one is best for your business.

Are The Rewards On Your Business Credit Card Worth The Higher Fees?

Reward points can add value to your business, but it's not one-size-fits all. Here's what you need to know.

Company vs sole trader: What's the verdict?

Here's the million dollar question: will you start up a company or will you establish yourself as a sole trader? Get the full story.

10 lessons we learned from starting our small business

Valiant Finance is a small business dedicated to supercharging the growth of other small businesses through access to funding. Here's what we've learned.