Also known as Invoice Finance, Factoring or Cash Flow Finance, when a business enters into a Debtor Finance arrangement, the Lender allows the business to borrow a percentage of their outstanding sales invoices/debtors – usually around 80%. As customers pay their invoices, and new sales invoices are raised, the amount available to be borrowed will change so that the maximum draw-down remains at 80% of the sales/debtors ledger.

Costs

• A “service fee” is typically payable on the face value of the invoices financed – this can be anywhere in the range of 0.50% to 3.5% (primarily driven by business turnover, no. of invoices, quality of debtors, type of facility etc)
• A “Discount fee” which is essentially interest payable on the amount borrowed at any time – typically between 10-12% p.a.

Benefits

• By receiving cash as soon as a sales invoice is raised (i.e. 80% of the invoice amount), the business will find that its cash flow and working capital position is improved
• The business will only pay interest on the funds that it borrows, in a similar way to an overdraft
• Invoice financing can be arranged confidentially, so that customers and suppliers are unaware that the business is borrowing against sales invoices/debtors before payment is receive
• Debtor Finance does not impose a charge or mortgage over any equity in property or other assets (refer Security below)
• Pay suppliers earlier to possibly take advantage of supply discounts due to early payment

Security

The lender will require a “General Security Agreement” (previously known as a floating charge) over the business which incorporates debtors.

Responsibility

Responsibility for raising sales invoices and for credit control stays with the business, and the finance company will often require regular reports on the sales ledger and the credit control process.

Target Market

Debtor Finance is typically targeted at companies with established systems and an expected annual sales turnover in excess of $1.5m. Lenders need to be satisfied that the client can manage their own sales/debtor ledger administration and credit control facilities.

Drawbacks

• The Lender may refuse to lend against some invoices, for example if it believes the customer is a credit risk, sales to overseas companies, sales with very long credit terms, or very small value invoices
• Debtor Finance is marginally more expensive than a commercial overdraft secured by property
• Once a business enters into an Debtor Finance arrangement, it can be difficult to leave as the business becomes reliant on the improved cash flow