How Does Debtor Finance Work?

December 15, 2017

Debtor financing has been gaining popularity in Australia as a way to finance small and growing businesses that need working capital. From just over the $2 billion per annum mark in 1994, the turnover has leaped to over $60 billion in 2015. Discounting is even more popular than factoring and is responsible for over 90% of the total market in 2015, compared to just 64% in 1995. This solution allows you to finance slow-paying invoices, which provides immediate funds to pay for company expenses. This article explains how the debtor financing process works and helps you determine if it is the right financing solution for your business

Debtor finance is a generic term referring to products that fund a company by financing its invoices. The two most common forms of debtor financing are invoice factoring and invoice discounting. Both solutions solve the same problem and provide similar benefits. However, they work differently and offer different features.

Invoice factoring is used by small companies that have cash flow problems. The solution provides three services – funding, credit advise and collections assistance. This type of funding is usually referred to as “disclosed” since invoices have a notice that warns the customer to pay the funds to the financier in settlement of the debt. Due to the involvement by the financier with a factored customer, the advance rate on such invoices is higher than with a confidential facility.  Invoice factoring works by financing invoices individually, usually in two instalments. The first instalment covers 80% – 85% of the total value of the invoice and is deposited to your bank account soon after processing.


The second instalment, the remaining 20% (less fees), is deposited to your account as soon as your client pays the invoice in full. This instalment settles that specific invoice. Most companies use invoice factoring regularly to improve their cash flow on an ongoing basis.


Invoice discounting is used by larger companies that have established credit and collections procedures. The solution provides funding only . Credit and collections are handled by the client rather than the finance company.  The customer or end-user is unaware of the funding being provided. Some facilities marketed as 'confidential' still require completion of anonymous 'audits' before invoices are funded.


The line operates as a revolving financing facility. The available amount decreases as customers pay your invoices and increases as you raise new invoices. Clients finance their invoices as batches, rather than individually. Most invoice batches can be financed up to 80% based on the credit quality of the invoices. However, the actual financed percentage varies based on underwriting criteria and client need.

Most financiers will fund invoices for up to 90 days from the month the invoice was issued. For debtors who take longer than 90 days, the financier will usually require the funding to be repaid by the customer, or more practically, the funding limit will decrease by this amount.  120-day recourse periods are provided in exceptional circumstances.


Financiers may insist on the client taking out credit insurance on their customers, with the policy and benefits assigned to the financier.


Credit limits may also be set on individual customers to minimise risk by some financiers, and 'concentration' limits might also limit funding available to major customers, or to specific classes of customers.

The process to set up an invoice factoring or invoice discounting accounts starts when the debtor financing company begins its due diligence process. As part of this process, the finance company reviews:

1.         That your business is properly organized

2.         That your clients have good commercial credit

3.         That your invoices are free of liens

4.         Your financial statements

5.         Your credit and collections procedures

The creditworthiness of your clients is critical for the success of the transaction. Debtor finance companies can finance only those invoices due from commercial clients that have good payment histories. The due diligence process usually takes a day or two for factoring transactions. The process takes longer for invoice discounting and more complex transactions.

The above list is a general list of items. The actual process varies by client. Note that the due diligence process to set up an invoice factoring account is usually faster and more flexible than the process to set up an invoice discounting account.

The customer notification process varies by product. In the case of invoice factoring, your customers receive a letter informing them that the debtor finance company is working with you and funding your invoices. The letter also advises them of the new address to remit payments.


Notifications for invoice discounting customers vary. For disclosed invoice discounting lines (the most common), your customers receive a notice advising them of the new payment address and procedures. If you have a confidential invoice discounting line, your customer may get a payment address letter, but the letter does not mention the debtor finance company.

In general, invoices are not verified when they are funded as part of an invoice discounting line. There are exceptions for certain invoices, such as those that exceed a certain value.

On the other hand, invoices are often verified when they are funded as part of an invoice factoring line. The verification process helps the financier confirm that invoices are:


1.         Accurate

2.         Free of disputes and problems

3.         Due in less than 90 days


The verification process can be done by phone, email or fax and is relatively simple. 

The process to fund the account varies by product. If you have an invoice factoring facility, your company submits a detailed report outlining each invoice that needs financing. The invoice factoring company processes these reports, ledgers the invoices and remits the funds to your bank account. As each client pays, invoices are settled individually.


The advance for each factored invoice ranges from 80% – 85%. The remaining 15% – 20% is deposited to your account, less fees, as soon as your client pays the invoice.


To fund an invoice discounting account, you have to submit a report that outlines the aggregate values of the invoices you want to finance. Depending on how your account is set up, the report may need to break out amounts by account debtor. Once the report is processed, the advance is deposited to your bank account. The advance ranges from 80% to 85% of the total value of your invoices.


The line operates as a revolving facility. As customer payments are received, they are posted against the outstanding financed amount, reducing it. Likewise, the line increases as you raise new invoices and submit them for financing. Excess reserves are returned as needed during this process.


All too complicated?


Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.



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