Every business can experience a lack of working capital at some stage. These cash flow gaps can be entirely unrelated to the long-term profitability of your business. Debtor finance is a way to access business funding by using your accounts receivables as collateral.

A growing business with a full order book doesn’t always result in cash in the bank. Debtor finance, also known as invoice finance, enables you to unlock the capital tied up in outstanding sales invoices.

Let’s take a look at how this business funding solution works, the different types of debtor finance, and how it can help your business.

How Does Debtor Finance Work?

Once you raise an invoice, you can use debtor finance to immediately access up to 95% of the invoice value. When your customer pays the outstanding invoice, you receive the remaining balance less fees.

Debtor finance is a flexible business funding solution that doesn’t require any property as security and doesn’t load long-term debt onto your business.

With a funding facility in place, you can finance as many or as few invoices as your need to cover cash flow gaps.

Is Debtor Financing a Good Idea?

When a business provides a service or sells goods to another business, they raise an invoice and usually have to wait for 30+ days for the customer to pay. This period waiting for debtor payments can make it difficult for the business to cover overheads, pay suppliers, and take on orders from new customers.

Debtor finance is a business funding solution that allows you to quickly turn your unpaid invoices into working capital. The COVID-19 pandemic has increased the time it takes for invoices to be paid.

According to 2020 Q2 data, every industry in Australia except mining has seen a dramatic increase in late payments. On average, payment times have risen 342.7% across all sectors.


Debtor finance is a way to cover the cash flow gaps caused by extended payment terms and late-paying customers. You can use your unpaid invoices to access an immediate cash advance or to secure a flexible line of credit based on the value of your accounts receivable ledger.

Why Businesses Use Debtor Finance

Both small and large businesses use debtor finance to cover cash flow gaps and secure long-term profitability. Debtor finance enables you to:

  • Pay suppliers and negotiate discounts for early payments
  • Offer extended payment terms to large customers
  • Increase stock levels for peak sales seasons
  • Take on new staff to increase workload capacity
  • Purchase or upgrade equipment
  • Avoid using your home as collateral to fund your business

Before you enter into a debtor finance agreement, it’s important to determine the need for the funding, and how it aligns with your long-term business goals.

Invoice Discounting vs. Invoice Factoring

There are two main types of debtor finance; invoice factoring and invoice discounting.

Both types of debtor finance have advantages and disadvantages that make them suitable for different kinds of businesses.

Invoice factoring transfers the responsibility of collecting payments to the finance company. Your customer will be aware of the invoice factoring arrangement.

Invoice discounting is typically a confidential arrangement where invoices are used as collateral to secure a line of credit. The business retains responsibility for collecting on the invoice, and customers are unaware of the relationship with the finance company.

What Is Invoice Factoring?

Invoice factoring is a comprehensive debt finance solution. You can use your outstanding invoices to access a line of credit for an immediate cash injection.

You send the invoice to the finance company, and they will handle the collection as part of the invoice factoring service. You will receive up to 95% of the invoice value as an advance, with the remaining balance less fees released when the invoice is paid in full.

It’s a good option for growing businesses that want to focus on attracting new customers and fulfilling orders, rather than managing accounts and chasing unpaid invoices.

What Is Invoice Discounting?

Invoice discounting allows you to access up to 85% of the value of your unpaid invoices, with the remaining balance released when your customer pays the invoice.

Many businesses use invoice discounting as a flexible line of credit. Once the facility is set up, the amount you can borrow increases and decreases according to the number of outstanding invoices submitted.

One of the key differences to invoice factoring is that you retain responsibility for managing accounts and collections. The relationship with the finance company can be confidential depending on the terms of the facility.

In general, invoice discounting is more beneficial for larger businesses that have internal accounting and collection departments.

If you need more information on the different types of debtor finance, take a look at our blog post “What Type of Debtor Finance is Right for My Business?”.

How Is Debtor Finance Different From a Traditional Loan?

A debtor finance solution is more flexible than a traditional bank loan or overdraft.

While a traditional loan or overdraft limit is typically restricted by the value of the real estate used as collateral, a debtor finance facility increases as the business grows and makes more sales.

Growing businesses are cash hungry, and extended payment terms can often result in cash flow gaps. As you raise more invoices, your facility increases, and you can access more working capital. This provides more control over cash flow and gives you the confidence to take on new orders and offer net terms to larger clients.

Repayments on a traditional fixed-term loan can also be a drain on working capital. If you take out a loan to cover a cash flow gap, you can incur fines and charges if you cannot afford a repayment. With debtor finance, the line of credit is secured against money that is owed to your business.

In simple terms, it’s an advance on your future income. When the invoice is paid, the amount owed to the finance company is automatically repaid. This ensures that your funding limit is always in line with your sales revenue.

Which Industries Can Benefit From Debtor Finance?

Debtor finance can be an effective finance solution for any business that offers extended payment terms to their customers. It’s particularly useful for companies that purchase inventory to process an order well before raising an invoice and completing a sale.

Both small businesses and larger companies can benefit from debtor finance. Small businesses are often financially impacted by the extended payment terms demanded by larger clients. For larger companies, debtor finance allows for faster cash cycles and accelerated growth.

The inability to access working capital is highly detrimental to the long-term profitability of a business. Traditional lenders are risk-averse, and qualifying for business loans is a long process that can stretch from weeks to several months.

With debtor finance, sales can be turned into cash flow, and capital can be immediately reinvested to grow your business.

ScotPac Debtor Finance

A lack of working capital is a drain on productivity and growth. If your business needs an immediate cash injection to secure its long-term profitability, a debtor finance facility could be the ideal solution.

We work with businesses of all sizes, helping our clients to find the best funding solution for their needs. If your business is facing a cash flow challenge, speak to one of our friendly financial advisers, and we’ll help you find the best solution for you.