Positive cash flow is a catalyst for business growth. But making more sales can sometimes result in a shortage of working capital. If you offer extended payment terms to your customers, you may experience cash flow gaps waiting for invoices to clear.

In our April 2020 SME Growth Index, we discovered that it takes an average of 56 days for Australian SMEs to get paid. At any one time, SMEs have around a third of their revenue tied up in unpaid invoices.

Debtor finance is a way to release the capital tied up in outstanding invoices. It enables you to use your accounts receivable to access fast funding and maintain cash flow.

What Is Debtor Finance?

When a business raises an invoice for goods or services, they will typically offer payment terms of 30 to 90 days. In general, the larger the invoice value, the longer the payment terms.

Debtor finance is a business funding solution that allows you to receive an advance on your unpaid invoices. This advance can be used to pay suppliers, stock inventory for peak sales seasons, and take advantage of opportunities that require investment.

Growing business and those with extended cash cycles can benefit most from this type of business finance. Instead of having to wait for your customers to pay, you can release the capital tied up in your sales invoices and reinvest in your business.

In simple terms, debtor finance can help you access the money you have earned much faster.

Compared to a business loan or overdraft, this type of funding facility is much more flexible. Traditional business finance is usually limited to the value of your home or a high-value asset used as collateral.

With debtor finance, funding limits are set by the number and value of the invoices you raise. The more sales you make, the more credit you can access.

How Does Debtor Finance Work?

Debtor finance works by using your unpaid sales invoices as collateral to access immediate funding.

You send the invoice to the finance company, and they will provide an advance of up to 95% of the invoice value. When the customer pays the invoice, you receive the remaining balance of the invoice less fees.

There are two main types of debtor finance:

Debt factoring
Invoice discounting

Both types of finance allow you to raise capital based on the value of your outstanding invoices, but they do have different features and advantages.

How Does Debt Factoring Work?

Debt factoring is more suitable for small businesses looking to overcome cash flow gaps using their accounts receivable.

The most significant difference between factoring and discounting is the responsibility for collecting on the invoice. With invoice factoring, the finance company will handle account management and collections.

You can access up to 95% of the invoice value within 24 hours.

Here’s how debt factoring works in 5 simple steps:

Step 1: Invoice your customer as normal

Step 2: Send the invoice to the factoring company

Step 3: Receive an advance of up to 95% of the invoice value

Step 4: Your customer pays the factoring company when the invoice is due

Step 5: The remaining invoice balance is released to your account minus any fees

Invoice factoring payments are typically made in two instalments. The first is made when you submit the invoice, and the second once the customer has paid the invoice.

For more information on debt factoring, take a look at our complete guide to accounts receivable factoring.

How Does Invoice Discounting Work?

Invoice discounting is generally used by larger companies with a dedicated accounts and collections department.

You can access up to 85% of the invoice value upfront, with the remaining balanced released when the customer completes payment.

Unlike debt factoring, you are responsible for collecting payment of the invoice.

Here’s how invoice discounting works in 5 simple steps:

Step 1: Invoice your customer as normal

Step 2: Submit the invoice to the finance company

Step 3: Receive an advance of up to 85% of the invoice value

Step 4: Collect payment from your customer

Step 5: Repay the finance company the amount advanced plus fees

Both invoice discounting and debt factoring advances can be funded as a lump sum or as a revolving line of credit. This can be beneficial for businesses that need regular funding to fuel their growth plans. The line of credit increases as you raise more invoices and decreases as your customers make payments.

The fees involved with factoring and discounting depend on the value of your invoices, the duration of the funding facility, the credit scores of your customers, and the type of debt finance.

In general, debt factoring cost more than discounting because of the collections and account management services included.

Recourse Or Non-Recourse Debtor Finance

The type of debtor finance arrangement you agree with the finance company impacts your liability for the debt, and the amount you will pay in fees.

Debtor finance solutions fall into two categories:


Recourse debtor finance means that you will retain responsibility for the debt if your customer fails to pay the invoice. In contrast, non-recourse funding arrangements place the risk onto the finance company. If your customer fails to pay, you are not liable for the money owed.

Because non-recourse debtor funding places all of the risk onto the finance company, you can expect to pay more in fees.

Debtor finance can help you avoid overextending with customers that may struggle to pay for the goods and services you provide. As part of your invoice finance facility, we will check the creditworthiness of your customers before funding an invoice.

We also offer Bad Debt Protection as an additional service to protect your cash flow if a customer fails to pay.

Confidential Or Disclosed Funding Arrangements

Debtor finance solutions can be confidential or disclosed.

Most debt factoring solutions are disclosed, and your customers will be aware of your relationship with the finance company.

If you would prefer to keep your funding relationship confidential, invoice discounting arrangements can provide access to capital without disclosing the finance company’s involvement.

Who Can Benefit From Debtor Finance?

If you offer extended payment terms to your customers, your business can benefit from debtor finance. For startups and more established businesses, debtor finance can be used to pay your bills, negotiate early payment discounts with suppliers, and offer net terms to entice new customers. According to a study by CB Insights, 29% of startups fail due to a lack of sufficient cash flow.

It’s important to align any business funding with your long term goals and growth plans. If you could use the money tied up in your debtors ledger to fuel the growth of your business, debtor finance can be an effective funding solution.

For businesses that mainly deal with cash transactions, there are more suitable funding solutions. Give us a call and ask one of our financial advisors how Trade Finance or Asset Finance could help your business.

Is Debtor Finance Right for My Business?

Debtor finance is an effective way to boost working capital by releasing the money owed to your business in outstanding invoices. Whether it’s the right funding solution for you depends on your unique circumstances and the reason for the funding.

We help people to unlock the hidden value in their business. Whether through debtor finance or an alternative funding solution, we’ll help you get the financial backing your business needs to flourish.