Debtor finance is no longer seen by businesses merely as a simple stopgap measure for quickly getting on top of unplanned cash flow demands.

Increasingly, it’s being acknowledged as an effective means to sustainably foster business growth while minimising the effects of market volatility.

It’s also being embraced as a more flexible option than conventional bank loans and overdrafts — one which doesn’t require real estate as security and which imposes far fewer constraints in the form of loan conditions and covenants.

However, despite this growing trend toward debtor finance over traditional loans, there’s still a limited awareness of the various kinds of debtor finance that are out there. In a recent survey it was found that fewer than 5% of SMEs actively assess the suitability of tailored credit facilities.

As a result, while businesses may be benefiting from improved lines of credit, they may be missing out on tailored solutions.

In this guide, we’ll look at the advantages and disadvantages of debtor finance in its various forms. We’ll also explore the kinds of businesses to which each line of finance is best suited.


Debtor Finance

Debtor finance is a catch-all term for a kind of finance in which a line of credit is secured by accounts receivable. Essentially, it’s a means by which a business can borrow money against what they’re owed from their customers.

An Adaptable Solution That Can Be Used in Conjunction With Traditional Loans

The big benefit of debtor finance is that, unlike conventional loan arrangements, it has no requirement for real estate or facilities. In addition to offering risk management advantages, debtor finance is a highly adaptable tool which can be used alongside conventional business borrowings without affecting their terms.

In addition to offering risk management advantages, debtor finance is a highly adaptable tool which can be used alongside conventional business borrowings without affecting their terms.

While typical debtor finance offers many advantages over conventional banking financing solutions, there may be more tailored options which fit the needs of specific businesses. We created a specific in-depth guide covering how does debtor finance work in details.


Ideal Solution for Larger Businesses

Typically, debtor finance is best suited to medium to large businesses, with a turnover greater than $200,000.

For such companies equipped with their own accounts receivable department, debtor finance can be completely confidential, allowing the business to manage their own accounts receivable directly.

The following variations on debtor financing are similar to standard debtor financing in terms of their flexibility and the absence of a real estate securities requirement. However, they have unique additional features, making them a better choice for businesses facing specific growth and cashflow challenges.


Invoice Discounting

Invoice discounting is a form of short-term borrowing which is designed to improve a businesses’ cash flow position.

This is achieved by allowing a business to draw money against outstanding accounts receivable. It allows businesses to grow consistently, unhampered by a need to constantly wait for customer payments before further investing in expansion.


Flexible Line of Credit Which Grows With Your Company Sales Growth

One obvious and immediate benefit of invoice discounting is that credit limits are not fixed. Limits grow in line with business revenue, freeing a business up from the onerous requirement of ongoing loan re-negotiation.

If a sudden sales opportunity arises, an invoice discounting facility can cater for the increased cash flow needs, whereas a conventional loan would require re-negotiating its terms and conditions.



Factoring refers to a service whereby a financial institution takes over the role of collections and chasing up on payments. The great benefit here for smaller business is that it frees them up to focus on growth rather than invoice management.

There are also potential downsides of this form of finance. Generally the amount you can access is capped at around 60% of revenue, although this can vary by institution. Scottish Pacific will pay up to 80% on approved invoices.

Furthermore, while factoring greatly increases a small businesses’ reach, it does generally mean the financial institution’s involvement is divulged to the customer. This may not be ideal in all circumstances.

An Ideal Finance Facility for Businesses Facing Rapid Sales Growth and Those Dealing With International Customers

Invoice discounting with Export factoring is ideal for businesses experiencing growth potential that is outstripping their growth capacity.

A business experiencing rapid sales growth is under pressure to rapidly capitalise on opportunities as they present themselves, and invoice financing affords that agility.

It’s also a great solution for businesses that are supplying goods or services on standard trade credit terms.
While trade credit terms are attractive for customers, without a suitable finance facility, there can be growth-hampering delays between issuing an invoice and receiving payment. Securing credit against pending invoices avoids that growth constraint.

Some non-bank finance providers offer export finance, which is the same package but geared toward international markets.

For example, Scottish Pacific’s export finance facility affords Australian businesses the flexibility to raise invoices to customers in over 20 approved countries.

Another advantage of this trade-friendly form of finance is that it can come with access to a specialist trade finance team, which permits SMEs to better traverse some of the risks inherent to international trade.


Selective Invoice Finance

Selective invoice finance is similar to invoice discounting. However, a key difference is that it is designed to be an on-demand service, used selectively and only when required.

Credit can be secured for relatively small invoice amounts, and can be secured against only one sales invoice, making it a great option for small businesses.

Once approved, this kind of finance is designed to permit rapid processing-times.

Scottish Pacific’s selective invoice facility typically has a processing time of less than 24 hours, with 80% of the value of the invoice then paid to the business and the remaining 20% released when the invoice is paid.

This facility works well when there’s a high exposure to a major debtor. There are no concentration restrictions with selective invoice finance. Scottish Pacific, for example, will approve 100% for a single debtor or major debtor balance.


Rapid, Flexible Credit on an Invoice by Invoice Basis

The overriding benefit here is in the flexibility that selective invoice finance affords. It allows a business rapid access to cash flow on an invoice by invoice basis.

It also limits unnecessary exposure to debt. SMEs are only paying for the finance they need and they are able to avoid the waste of paying non-usage fees and interest on unused borrowed funds.


A Solution Tailor-Made for Seasonal Businesses And Startups

Selective invoice finance is great for seasonal businesses.

Businesses with cash flow that fluctuates according to the time of year are unlikely to require a standing line of credit. In fact, for much of the year, such an arrangement would be an inefficient use of resources.

By accessing selective invoice finance, seasonal businesses are able to absorb sudden bursts in demand for additional working capital, without overextending. They’re effectively able to increase or decrease their cash flow on a sale by sale basis.

It’s also an ideal option for startup or exploratory businesses with at least 6 months trading history but who are unsure of the extent of the market they’re dealing with.

These kinds of businesses may be daunted at the prospect of committing to a long-term finance facility but a rapid, small-scale solution may afford the same advantages with less upfront financial commitment.


What Debtor Finance Works Best for You?

Debtor finance was once seen as a stopgap measure for handling unexpected cash flow challenges.

More SMEs are now embracing debtor finance as a tool which offers greater strategic growth potential than conventional loans.

Businesses with larger turnover are looking to debtor finance as a means of gaining cashflow without having to use real estate or facilities as security. They’re also using it to do business more favourably on trade credit terms.

Smaller businesses experiencing rapid growth are taking advantage of invoice discounting with factoring to hand over the role of collections and invoice management to a financial institution, greatly increasing their capacity to focus on their core businesses.

Seasonal and startup business enterprises stand to benefit greatly from the flexibility afforded by selective invoicing, with its quick processing times and low invoice amount requirements.

Whatever unique challenges your business is facing, it’s well-worth looking closely at the various forms of debtor finance that are available and choose the facility which works best for you.

What cash flow challenges is your business facing? If you’d like advice on the best debtor finance facility for your needs, you can contact a Scottish Pacific financial adviser here.