In Australia, “debtor financing” is used as an umbrella term to refer to invoice factoring, invoice discounting, or progress claim financing. These three solutions help companies that have cash flow problems because their clients pay their invoices slowly. Debtor financing allows companies to leverage their accounts receivable ledger, improving cash flow and providing funds to pay for important business expenses.
Are clients paying invoices in 30 to 60 days?
Most sales to commercial clients are done on net-30 to net-60 days payments terms. These terms give your clients up to 60 days to pay an invoice. They are standard and most larger clients ask for them during the course of normal business. As a small to midsize company, you have little choice. You have to offer payment terms if you want to do business with larger companies.
Unfortunately, many companies can’t afford to wait 30 to 60 days to get paid. They need the money sooner so they can pay their own expenses, such as employee wages and supplier payments. Debtor financing can solve this problem, providing the funds your company needs.
Small companies often use invoice factoring, which provides financing and credit management. Larger and more established companies generally use invoice discounting, which is a funding-only facility. Lastly, companies in the construction trade use progress claim financing, a special type of program which allows them to finance their progress claims.
Option #1: What is invoice factoring?
Invoice factoring is a type of debtor financing that is often used by smaller and midsize companies. It provides them with an integrated financing and credit management solution.
The process is fairly simple and invoices are financed and tracked individually. The debtor finance company checks the commercial credit of your client. If your client is approved, the finance company funds your invoice in two installment payments.
The first installment covers up to 85% of your invoice and is deposited to your bank account soon after you raise it with your client. The second installment, which covers the remaining 15% (less the fee), is deposited to your bank account when your client pays the invoice in full. This settles the transaction. Small companies tend to use these plans regularly, which provides for improved cash flow.
Learn more about invoice factoring.
Option #2: What is invoice discounting?
Invoice discounting is used by midsize companies that already have an established credit and collections function. The solution works as a “funding-only” program that finances your accounts receivable ledger in bulk. Individual invoices are not tracked or managed. Collections remains the responsibility of the client.
The funding process is similar to the factoring process. Your company gets an advance of up to 85% of the qualifying invoices. These funds are deposited to your bank account when you make the funding request. Transactions settle as your customers pay off their invoices. Fees are usually collected at settlement.
Learn more about invoice discounting.
Option #3: What is progress claim financing?
Progress claim is a type of debtor financing that allows subcontractors in the construction trade to finance their progress claims. The solution operates much like an invoice factoring line, with a few exceptions.
Due to the nature of the transactions, companies can usually finance up to 75% of a progress claim. The funds are deposited to your bank account as soon as the progress claim is verified. Your company gets the remaining 25%, less fees, as soon as the progress claim is paid in full.
Progress claim financing can be used only by companies that operate under the Security of Payment Act. Furthermore, the company must operate as a subcontractor to a principal contractor or work directly for an end employer.
Learn more about progress claim financing.
Advantages and Disadvantages
The primary disadvantage of most debtor financing programs is the cost. These solutions are more expensive than a line of credit or an overdraft facility. However, debtor financing has a number of advantages, including:
- It is available to small and midsize companies
- No real estate security is needed
- Lines are flexible and grow easily with your business
- It enables your company to offer payment terms with confidence
- Lines have a simple underwriting process
- It can be deployed quickly, often in a week or two
Learn more about the advantages of debtor financing.
How much does it cost?
The cost of a debtor financing line is determined by the amount of funding you need, the credit quality of your invoices, your industry, and how well your company is managed. To learn more details, read “Debtor Finance Costs Explained“.
Need a debtor financing quote?
We are a leading debtor financing company in Australia and can provide you with a competitive quote. For an instant quote and to get more information, fill out the enquiry form.