Unlocking the value of accounts receivable
With debtor finance – also known as invoice finance and invoice factoring – the finance company provides funding based on the value of outstanding invoices. In effect, the borrower gets a short-term business loan using the invoices as collateral.
Many businesses, especially when selling to other businesses, offer invoice payment terms which give customers an extended period of time to pay for products or services. This payment period is usually 30 days, but could be from seven to 90 days. The carrying costs of account receivable are significant. One study in Healthcare Financial Management Magazine found that the total cost of carrying accounts receivable is 1.82 per cent at 30 days, 10.29 per cent at 60 days, 9.74 per cent at 90 days and 30.71 per cent at 120 days. Learn more in What Are the True Carrying Costs of Accounts Receivable?
Although offering invoice payment terms makes it easier to do business, the company issuing the invoice has to wait for the payment to be made. If many customers pay their invoices late, the businesses will suffer cash flow issues and lack working capital.
How does debtor finance work?
With debtor finance, the lender will analyse the unpaid invoices of a business to determine the risk involved. Once the invoices are approved by the funder, a debtor financing facility is set up based on the value of accounts receivable. Depending on the lender and perceived risk, this amount could be 80 to 90 per cent of the total value of invoices.
With debtor finance, the business gets the money it’s owed by customers sooner. This can alleviate cash flow problems for growing businesses. When the invoices are paid, the borrowing business gets the remainder of the funds from the invoice finance company, less interest and fees.
One of the main benefits of invoice finance is its speed. Debtor finance can often be arranged in 24 hours. At the same time, one of its biggest shortcomings are the fees and charges that can add up over time if invoice finance is used on an ongoing basis, like a line of credit. Learn more about this in How Much Does Invoice Finance Cost?
What type of businesses use debtor finance in Australia?
Debtor finance is suitable for businesses that sell to other businesses and have a substantial amount of accounts receivable. For a small business with $20,000 of $30,000 in accounts receivable, it’s probably not an option, as these amounts are not worthwhile for most debtor finance companies to work with. For example, some major banks offering debtor finance require that a business has at least $500,000 in receivables before they offer this service.
A new alternative to debtor finance
Companies that want to offer credit terms to their business clients but don’t want to risk shortages of cash flow didn’t have many options beyond debtor finance until now.
Moula Pay is a smarter way to offer your business customers payment terms. When you sell to other businesses and your customers pay with Moula Pay, you get paid upfront. At the same time, your customers get up to three months free from interest and repayments, or can take a longer-term repayment plan if needed.
Your customers also benefit by getting up to 12 months to pay, with the first three months interest and repayment-free.
Learn more about becoming a Merchant and getting paid upfront with Moula Pay.