About Debtor Finance|Benefits|Eligibility|Improving Debtor Quality|In-Context Finance

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Debtor Finance has been one of the fastest growing forms of financing over the last 10 years. It is a mainstream financial solution, not just one for the financially challenged, and providers of Debtor Finance solutions range from the major banks to specialist financiers.

What is Debtor Finance?

A financing arrangement where a lender advances money against the trade debtors of a business. Advance rates vary between 70% to 90% but are typically up to 80% of the value of the acceptable invoices. Read below about Eligibility for Debtor Finance.

Once the facility is established, most lenders will advance the funds within 24 hours of the invoices being presented to the lender. The balance of the value of the financed invoices are returned to you when the invoices are paid by your customers.

Benefits of Debtor Finance

Assists cash flow of the business by freeing up cash tied up in trade debtors.
Highly flexible solution and ideal for rapidly growing or highly seasonal businesses. The debtors ledger is the key security and size of the facility can increase in line with growth in sales and debtors.
Real estate security is not usually required.
Freed up cash can be used to take advantage of discounts from suppliers.
Can be a more cost effective way of accessing cash flow than accepting early settlement discount terms, particularly when dealing with major corporate customers

Types of Debtor Finance

There are two main categories: Invoice Discounting and Factoring.

The key differences between Invoice Discounting and Factoring are:

Administration of debtors ledger and collection of accounts. With Factoring, the Factor (lender) takes on this function. With Invoice Discounting, your business remains responsible for this function.
Disclosure to Customers: Factoring is a Disclosed solution. Your customers are notified that payments are to be made to the Factor (the financier). Invoice Discounting is a Confidential product.

Debtor Finance has evolved into a highly sophisticated segment of the finance industry. Hybrid forms of the two main categories such as Confidential Factoring are now offered by debtor finance specialists. Some specialists also provide Export Debtor Finance; some have added inventory financing (albeit with tightly prescribed conditions) to their solutions.

Eligibility

· Only commercial debtors can be financed.

· It must be a legally enforceable debt. If payment of the invoice is subject to performance or certain other conditions, it will not qualify for debtor financing. Example: Progress claims, common in the construction industry, do not qualify.

· Concentrations: Financiers differ in their policies on this. Some will not accept debtors ledgers where more than 30% of total debtors are represented by a single customer. At the other extreme, certain financiers will not finance a debtors ledger with hundreds of small invoices. Some financiers have developed solutions for each of these two extremes of debtor spread.

· Quality of Debtors Ledger:

1.   Ageing: The usual cut off age is 90 days although some financiers may, under special circumstances, accept debtors of up to 120 days. Where a blue chip customer has standard payment terms of say, 60 days, financiers will make allowances for this. When invoices that have been financed go past 90 days (or such other agreed cut off period), the financier has recourse to your business for repayment of the applicable advanced amounts.
2.   MIS/Credit Controls: Quality of credit controls applied when extending credit, quality of management information systems and debtor collection management processes will determine whether your business qualifies for debtor finance and if so, whether factoring (disclosed) or invoice discounting (confidential) is the appropriate form. With Invoice Discounting, all of these must be ship-shape.
3.   Disputes/Returns: A business with high levels of disputes and returns would not be eligible for debtor financing as invoices subject to dispute are likely to void any legal obligation by customer to pay. A high level of these incidents are usually symptoms of other issues in your business including supply chain issues and product quality controls.

Would you like to:

reduce the overall ageing profile of your debtors ledger,
have processes in place that increase the efficiency of your debtors ledger, or
be able to identify the issues in your operations that are causing high levels of returns/disputes which ultimately lead to lost sales, potential loss of customer goodwill and brand damage.

The benefits of addressing all of the above issues include (a) ability to utilise one of the most flexible forms for financing for your business, (b) reduce costs of financing, and (c) improvement in business profitability.