A business can be profitable and have a full sales ledger, but if capital is tied up in its accounts receivable, there’s no money to pay suppliers, cover overheads, and fulfil new orders.

Australian businesses have traditionally turned to bank loans and overdrafts to support working capital and cover cash flow gaps. But accessing these types of funding is increasingly difficult.

Debtor finance is a flexible and more accessible source of funding that can provide the financial backing needed to support long-term growth.

What is Debtor Finance?

Debtor Finance is a type of business finance that enables companies to unlock the capital tied up in their accounts receivable. If a business offers net payment terms to its customers, it can take 30+ days after an invoice is raised for payment to be received.

With debtor finance, the business can use its outstanding sales invoice to get paid faster and smooth over cash flow gaps. A cash advance or line of credit is secured against the unpaid invoice.

Read our guide How Does Debtor Finance Work to find out how you can turn your outstanding invoices into a source of readily available funding.

There are several reasons why a business might need to unlock the capital tied up in its accounts receivable and increase liquidity.

1. Raising Capital for New Businesses
Raising capital is a pressing challenge for any new business. Securing finance can be particularly difficult for business owners who lack the personal assets required to meet traditional banks and finance providers’ strict lending criteria.

Debtor finance is a much more accessible form of funding. There’s no property security requirement, and it’s accessible to companies without a long trading history. Because the financing is secured against your accounts receivable, the finance provider is more interested in your customers’ creditworthiness.

If your new business doesn’t qualify for a traditional bank loan or overdraft, a debtor finance facility can be a quick and accessible way to raise funds.

2. Funding Rapid Growth
Periods of growth are an exciting time for a business owner, but they also pose financial challenges. As sales orders increase, so do the costs associated with processing those orders.

If your business offers extended payment terms to its customers, an influx of sales can leave you vulnerable to cash flow gaps and a shortage of working capital. While waiting to receive payment from your customers, your business will still need to pay suppliers and cover overheads to process new orders.

Debtor finance allows you to get paid for your goods and services faster. The funding facility limit increases in line with the sales invoices you raise to support your growth and allow you to capitalise on new opportunities.

Because the funding facility is linked to your accounts receivable, you will always have enough cash at hand to cover your working capital requirements.

3. Management Buyouts
Traditional sources of financing are often unsuited to the funding needs for a management buyout. Loans and overdrafts are typically secured against private property, so they can be hard to access and can also put your home at risk.

Venture capital is a potential source of funding, but it can be challenging to find investors in the time frame needed to complete the buyout. Some business owners also prefer not to hand over a significant stake of their business to an outside financier.

Debtor finance can supplement other sources of funding to raise the capital needed to buy out existing shareholders. By utilising the money tied up in the company’s accounts receivable, a debtor finance facility can provide the funding required to complete a management buyout without the need for significant personal investment.

4. Trading and Cash Flow Difficulties
Extended payment terms and slow-paying customers can restrict cash flow and slow down the growth of a business. With working capital tied up in outstanding invoices, a company can struggle to pay suppliers and trade as usual.

A debtor finance facility can provide the liquidity needed to overcome trading difficulties, pay suppliers, and get the business moving again. The longer that a company is unable to trade, the more revenue lost.

By unlocking the capital tied up in accounts receivable, business owners can take back control of their cash flow and take advantage of opportunities that they would otherwise be unable to capitalise on.

5. Loss of Major Customer to Insolvency or Competition
Losing a major customer due to insolvency or competition can be severely detrimental to cash flow. Unfortunately, it’s something that most business owners will go through at some point during the life of their company.

The best way to deal with the loss of a client is to focus on marketing and lead generation to gain new customers. But these activities require time and resources.

Debtor finance can be an effective way to increase liquidity and provide additional cash flow to support your sales volume recovery. You can access the capital tied up in your unpaid invoices and quickly reinvest in your business to recover from the loss of a customer.

6. Seasonal Sales
A seasonal sales cycle introduces unique challenges that need to be overcome to achieve sustainable long-term growth. Annual revenue can depend on a small window of peak sales. Inventory and cash flow management need to be just right, or you can easily lose the bulk of your yearly profits.

Seasonal businesses need enough liquidity to increase stock levels before peak seasons and cover slower periods where less money is flowing into the business.

A debtor finance facility can be an effective funding solution for businesses with seasonal sales cycles. You can access funding to help cover your costs during slow seasons and quickly access your sales revenue during peak seasons to reinvest and take advantage of the increased trade.

If your business suffers from seasonal sales, consider creating a cash flow forecast to help predict your working capital needs to fully capitalise on your peak season.

7. Import and Export
Import and export businesses often find cash flow put under pressure. Without third-party funding, many companies would find it impossible to trade internationally. According to the World Trade Organization, up to 90% of global trade relies on trade finance.

Trade Finance is a funding solution that utilises debtor finance to support the working capital needs of both importers and exporters.

For an import business, debtor finance can bridge the gap between paying an overseas supplier and receiving payment from customers once the goods are received and sold. Importers can also use additional funding to increase their purchasing power and negotiate better terms with international suppliers.

For exporters, a debtor finance facility can be used to unlock capital tied up in the manufacturing and shipping of goods. Rather than waiting for goods to arrive at the destination country before receiving payment, exporters can get paid as soon as they have raised an invoice.

ScotPac Debtor Finance

There are plenty of reasons why your business could benefit from a debtor finance facility. Unlike an overdraft or loan, you don’t need to use your property as security, and the amount of credit you can access increases in line with your sales.

A funding facility can sit alongside your existing financing arrangements, and you don’t need to take on further long-term debt to ease short-term cash flow gaps.

If you’d like to find out more about debtor finance or alternative business funding options, contact our friendly team of financial advisors today. We’ll help you find a funding solution that’s right for your business.