ABOUT DEBTOR FINANCING - THE PROS AND CONS

How Does Debtor Financing Work?

Debtor financing is primarily a B2B financing method; It utilises the value of uncollected debtors on a company's balance sheet as security for a cash advance.

For many businesses this provides an extremely useful release of cash which would otherwise be locked up, while the business waits for its customers to pay in accordance with usual credit terms stretching out to 60 days or more.

Under a typical debtor financing arrangement we advance up to 90% of an invoice's value - at the same time as we arrange for your customer to make payment us instead of you.

After the customer has settled the invoice, you are paid the remainder of (10%) less a small fee.

What Kind of Cost Is Involved?

Debtor financing arrangements will vary greatly between financiers, depending on the legal nature of the facility provided, the amounts involved and the time span.

Larger-value financing of debtors involving ledger values of at least $500,000, will attract application fees, a percentage of ledger value fee (typically around 3% to 5% per annum), then a discounting fee which runs a bit like an overdraft, with a cost of something like 10% to 15% on an annual basis.

Smaller transactions may be based on a single invoice, or perhaps a batch of invoices, with a fee charged on the invoice value being financed. Depending on the financier, application and ledger facility fees may also be charged as well. This kind of structure will typically cost 5% or more per month, and for this reason is best not used on continuous long-term basis.

Other Costs and Requirements

It's important when evaluating the suitability of a debtor financing arrangement for you, that you consider all the terms and conditions. Typically larger arrangements will run for a minimum period of time, say 12 months, and be based on financing the whole of your debtors ledger.

In addition, supporting real estate security may be required.

If you have larger operation to finance, these restrictions and costs need not be a deal-breaker, and in fact on a careful analysis can prove to be quite cost-effective.

Smaller bushiness's however are likely to find such all-encompassing arrangements and the lock-in to a fixed periods to be too restrictive, and unnecessarily expensive.

So frequently the better way for a smaller operation is to finance individual invoices on an ad-hoc "as-needed" basis, with one simple fee, no security requirements and no lock-in.

The nominal financing fee may appear at first glance to be higher, but close cash flow management - always a good idea! - can help to keep actual costs very low, by only using the finance when it's absolutely necessary, and only for as long as it's needed.

Debtor Financing: What To Do Next

If unpredictable or sluggish slow cash flow is hindering the progress of your business  or even if you have a business emergency, then you need to take action. 

The Invoice Finance option we offer is doesn't tie up any property security, or lock you in. And to keep cost to a minimum we help to plan your finance so as a  convenient stand-by arrangement. You can draw down on short notice (usually within a business day), and keep the arrangement just as long as you need to.(The term of individual invoices will of course need to be managed.)

We're Available For A Free Consultation

To cut to the chase and get a quick and frank assessment of your cash flow financing options, without any obligation, call on Nathan 1300 055 233 or Fast Track your confidential debtor financing application here.