Debtor finance allows a business to leverage its accounts receivable book as collateral for financing. Debtor financing is commonly used by invoice heavy businesses to unlock the value and cash sitting in receivable invoices upfront as a way to manage working capital.
Debtor finance is usually used as a short term solution to plug cash flow due to debtor facilities often having relatively high interest rates on an annualised basis when compared to other business finance product types. It also allows a business relatively quick access to cash compared to other loan products.
The need to know
- Debtor financing is broken in to two different classifications:
- Invoice discounting – the business will continue to manage the collection of payment from the invoiced customer and then repay the lender themselves.
- Invoice factoring – the lender will take over the payment collection process on any invoices put forward.
- Generally, a debtor financing service will pay you up to 80% of your outstanding invoice value now, and pay you the balance after customers fulfil their payment requirements (minus a fee for providing the money upfront).
Categories of loans
There are multiple type of debtor finance products available depending on loan need and receivables profile of the business looking to borrow.
| Metric | Finance all of my client’s receivables | Finance specific invoices |
|---|---|---|
| Amount | $15k – $4m+ | $5k – $500k |
| Advance up to 80% of invoice value. Repaid on payment of invoice. | Advance up to 80% of invoice value. Repaid on payment of invoice | |
| Rates | 9 – 12% p.a. | 0.9 – 4.5% per 30 days |
| Fees | 0.15 – 1.10% of invoice value | 0.50 – 1.10% of invoice value |
| Key requirements | • Copies of issued invoices • 2 years financials • 6 months bank statements • Statement of assets & liabilities • Accounts receivable & payables |
• Copies of issued invoices • 6 months bank statements |
Key acceptance criteria
For a high chance of approval, a business must satisfy at least 2 of the below criteria.
- Large, high quality debtors
- Clean credit file
- Strong recurring sales
- Invoices are issued and payable (i.e., not future contract income)
Example scenario
High-growth plastering business
Client’s business was doubling in size year-on-year but with a big gap between provision of services and payment. They needed to fund their invoices, but their industry (construction) and ATO position made getting approved hard.
Key transaction terms
- Amount – $2m
- Loan need – Cashflow
- Product – Invoice finance
- Result – Valiant found a solution at less than half the cost of the clients existing quote (2.2% per month vs 4.5% per month!) Client has used the facility every month since, enabling their growth and success.
More information
For more information on the above loan types, you can read more about them at Valiant. Check out the links below.
For more information on Connective's partnership with Valiant or Valiant's business loan platform please contact your Broker Support Manager, Valiant BDM, by calling them on 02 9571 0218 or connective@valiant.finance
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