About Debtor Finance In the past there has been an element of confusion surrounding what debtor finance is and how it works. This confusion stems partly from the fact that debtor finance goes by a number of names, including factoring, discounting, receivables finance, invoice financing, cash-flow finance, the list goes on. All these terms are correct. Regardless of the name ascribed, debtor finance is a simple and straight-forward finance facility. Factoring and Discounting are two options for businesses to improve their cash flow by accelerating the cash cycle. Both of these financial arrangements are primarily secured against the unpaid invoices of a supplier of goods or services. Under both facilities the supplier enters into an arrangement with a debtor finance provider and sells its unpaid invoices on an ongoing basis for access to cash within a few days instead of waiting the typical 30-60 days |
Many SMEs lament that they are profitable on paper but suffer from poor cash-flow positions, which often stymies their growth aspirations. Debtor finance provides a solution to this problem. While it’s true that debtor finance is at times viewed as a tool to merely overcome short-term cash-flow constraints, there are a growing number of Australian businesses engaging it more strategically to grow their business. The enhanced cash-flow position of a company can be used to employ more staff, purchase additional stock, pay suppliers in return for an early payment discount, or to take advantage of new business acquisition opportunities. According to research undertaken by the DIFA, Australian businesses recognized the three key benefits of debtor finance to be; * The freeing of cash within 48 hours (usually varying between 75-90% of the value of an invoice), allowing the business to accelerate growth; * The ability to utilise the improved cash flow position to obtain early settlement discounts from suppliers/creditors (up to 5%); A reduction in management time spent on chasing slow payers (through a Factoring arrangement), allowing managers of the business to concentrate on areas more appropriate to their responsibilities, such as driving new business. The fact that debtor finance generally doesn’t require real estate security is another particularly attractive feature, especially in an environment of stagnating or reducing real estate valuations that can adversely impact traditional overdraft facilities |