• About Debtor Finance


    In the past there has been an element of confusion surrounding what debtor finance is and how it works. This confusion stems partly from the fact that debtor finance goes by a number of names, including factoring, discounting, receivables finance, invoice financing, cash-flow finance, the list goes on. All these terms are correct.

    Regardless of the name ascribed, debtor finance is a simple and straight-forward finance facility.

    Factoring and Discounting are two options for businesses to improve their cash flow by accelerating the cash cycle. Both of these financial arrangements are primarily secured against the unpaid invoices of a supplier of goods or services.

    Under both facilities the supplier enters into an arrangement with a debtor finance provider and sells its unpaid invoices on an ongoing basis for access to cash within a few days instead of waiting the typical 30-60 days.

  • The Benefits


    Many SMEs lament that they are profitable on paper but suffer from poor cash-flow positions, which often stymies their growth aspirations. Debtor finance provides a solution to this problem.

    While it’s true that debtor finance is at times viewed as a tool to merely overcome short-term cash-flow constraints, there are a growing number of Australian businesses engaging it more strategically to grow their business.

    The enhanced cash-flow position of a company can be used to employ more staff, purchase additional stock, pay suppliers in return for an early payment discount, or to take advantage of new business acquisition opportunities.

    According to research undertaken by the DIFA, Australian businesses recognised the three key benefits of debtor finance to be;

    • The freeing of cash within 48 hours (usually varying between 75-90% of the value of an invoice), allowing the business to accelerate growth;
    • The ability to utilise the improved cash flow position to obtain early settlement discounts from suppliers/creditors (up to 5%);
    • A reduction in management time spent on chasing slow payers (through a Factoring arrangement), allowing managers of the business to concentrate on areas more appropriate to their responsibilities, such as driving new business.

    The fact that debtor finance generally doesn’t require real estate security is another particularly attractive feature, especially in an environment of stagnating or reducing real estate valuations that can adversely impact traditional overdraft facilities.

  • How does it work?


    Factoring and Discounting are two options for businesses to improve their cash flow by accelerating the cash cycle.

    Under a Factoring arrangement the provider additionally manages its client’s sales ledger and collection of accounts. Therefore, under a Factoring arrangement the debtor is aware of the arrangement and makes payments directly to the provider.

    Under Discounting, which is an undisclosed facility, the debtor is unaware of the arrangement and makes payments to the client, as per usual, but as the debt is owned by the provider, the client manages the collection process and then passes the revenue collected to the provider.

    Generally, a Discounting arrangement would be utilised by larger businesses as they have in place the in-house resources to manage receivables collections and the reporting requirements of a provider. Conversely, smaller organisations often prefer a Factoring arrangement as they are alleviated of the responsibility of managing receivables collections, allowing management to concentrate on other business functions.

    One of the attractions of both Discounting and Factoring is that they are self-liquidating facilities, meaning that a business isn’t taking on additional debt per se, but rather accessing money that is already owed to it. The goods or services have already been provided, and while the facility needs to be repaid, this should take care of itself as a matter of course as the company’s debtors settle their invoices over time.

  • Features

    The key features of debtor finance include:

    Improved Cash Flow
    A better cash flow helps to save time and money, leads to greater profits and increases confidence in future planning.

    Debtor finance is one of the most flexible forms of finance available to business, as the available funds increase with the value of the credit-approved invoices.

    Factors/Discounters usually charge a service fee plus interest on funds utilised. The fees depend on volume of sales and the level of services that are provided.

    With its professionalism and weight in the marketplace, a Factor can often collect debts more quickly and effectively then a small independent business.

    Credit Management
    The Factor/Discounter can provide the business with regular, up-to-date informatiom on the status of its sales ledger and the performance of its trade debtors.

    Credit Protection

    The Factor/Discounter undertakes credit checks on the business’s debtors and may set a rate for credit protection under a non-recourse arrangement. The Factor/Discounter will pay the business, regardless of whether the invoice has been paid.

    Credit Assessment
    A Factor/Discounter has access to credit reference databases that many businesses may not be able to afford. A Factor/Discounter can advise the business on the credit-worthiness of current and potential debtors.

    Potential cost savings afforded through debtor finance include:

    • Cost of bank overdraft
    • Fewer bad debts
    • Costs of account management, administration and credit control
    • No need to offer discounts to debtors for early payment
    • Management time can be devoted to other aspects of the business
    • Discounts from suppliers for early or prompt payment.
  • Eligibility

    Eligibility Criteria

    Debtor finance facilities require the following:

    • A business should have a projected minimum annual turnover of $200,000.
    • Goods should be sold on normal credit terms.
    • There should be a spread of debtors so that no one debtor is responsible for a large part of the total outstanding debt.
    • Discounting customers should have an efficient debtors ledger and credit assessment system.
    • Debtor finance is NOT suitable for retailers, contractors receiving stage payments, or business sector with a disproportionate level of trade disputes.

    Debtor finance is most suitable for a business when it:

    • Has rapid sales growth
    • Sells tangible goods or services
    • Is trading profitably, or can demonstrate emerging profitability
    • Regularly exceeds its current overdraft limit
    • Is unable to meet large orders or seasonal peaks
    • Is fully borrowed against fixed assets
    • Has credit terms with trade debtors
    • Has a suitable credit history
    • Has most sales not on consignment, or ‘sale or return’.
  • FAQs

    Q. What is debtor finance?

    Recourse and non-recourse arrangements

    A.The distinction between recourse and non-recourse arrangements is that under the latter the factor/discounter acquires the debt at its own credit risk. In practice, virtually all factoring/discounting in Australia is conducted on a recourse basis, and these arrangements generally operate along the following lines:

    • The assignor (client) and factor/discounter enter into an agreement whereby, for the term of the agreement, the assignor offers its debts that are due (or that will become due) for sale to the factor/discounter;
    • The factor/discounter may have the discretion to accept or reject the offer;
    • The factor/discounter determines the availability for funding based on the value of debts purchased and their classification as approved or disapproved for funding. For example, debts that are over 90 days old are commonly not eligible for funding against.
    • Funding is then made available and drawn by the assignor.

    For factoring/discounting arrangements (both recourse and non-recourse) the assignor will normally be making a financial supply when it assigns the debt (or part of it) to the factor/discounter.

    The following frequently asked questions are addressed below:

    Q. What is Discounting?

    A. Invoice discounting, which is commonly referred to just as discounting, is simply turning your unpaid invoices into cash. You literally sell your unpaid invoices to the discounter.

    Q. What is Factoring?

    A. Factoring involves the sale of your unpaid invoices as above, but in addition the sales accounting functions are then provided by the factor, who manages the sales ledger and collection of accounts.

    Q. What is the difference between Factoring and Discounting?

    A. Under both facilities you sell your unpaid invoices for immediate access to cash, but under a factoring arrangement the factor additionally manages the sales ledger and collection of accounts. In essence, factoring enables you to outsource the record-keeping associated with the collection and management of your sales invoices.

    Q. Unpaid Invoices – A Problem or an Asset?

    A. It is not unusual for a business to regard unpaid invoices as a problem. But they are an asset of the business, commonly one of its largest assets, and just as commonly one of its most under-utilised. With cash flow finance, the problem of unpaid invoices can be turned into an asset – cash in the bank account.

    Q. How does debtor finance help a business?

    A. Debtor finance provides immediate funds for business growt1h and allows your management to concentrate on the core activities of running the business. By improving your cash flow you maintain control over your business and can enjoy:

    • Reduction in administration overheads
    • Increased sales
    • Supplier discounts
    • Increased profits
    • Bigger orders by offering affordable credit terms.

    Q. What is the legal nature of debtor finance and attendant risk considerations?

    A. Debtor finance facilities are provided by a range of companies. Some financiers provide both factoring and invoice discounting, whilst some specialise and offer only factoring or invoice discounting. Those that are not a bank might be a subsidiary of a bank or be an independent financier. Some financiers offer non-recourse facilities in addition to the more usual recourse facilities, and some provide funding against debts arising from export sales. Clearly Australian businesses have a wide range of facility providers and facility types to choose between.

    Under a debtor finance facility a client sells its trading debts to the factor or discounter and receives a payment or payments for those trading debts. The legal nature of factoring/discounting is accordingly the sale of the client’s trading debts (ie its unpaid invoices) to the factor/discounter, and the payment for these debts provides the funding to the client. In turn a factor or discounter raises its funds to make payments to clients in many ways. Some factors or discounters give company charges to their funders under which a charge is given to the funder over the factor or discounter’s assets, including trading debts acquired from clients. Other factors and discounters might rely on equity raisings or unsecured bonds, whilst some might have a securitisation programme under which trading debts are on‑sold to raise funding. Depending on the nature of these funding arrangements, the client may face adverse consequences in the event of the factor/discounter being unable to meet its obligations to the funder. For example, the ability of the factor/discounter to transfer debts back to the client could be affected by these arrangements. Factors/discounters may employ specific mechanisms to protect the client. The terms and conditions of each facility should be carefully considered, and inquiries made of the factor/discounter for specific details.

    A business determining its financing requirements should consider the various alternatives which are available. In many cases the business should obtain independent legal, financial and taxation advice to assist in identifying the appropriate alternative.

    Q. Will my business qualify?

    A. A key requirement to qualify for debtor finance is to ensure that your debtors’ ledger does not carry any unreasonable commercial risks. We have a few guidelines to help us here:

    • Invoices should be for goods/services which have been fully delivered/completed. (e.g. progress invoices on unfinished jobs would generally not be acceptable.)
    • If asked, your customer should be able to confirm that the invoice is accurate and that no dispute exists. You should be able to provide proof of delivery of your goods and/or satisfactory completion of services.
    • Invoices which are older than 90 days (from the end of the month in which they were issued) are not usually eligible for financing.
    • Extra care is needed where any customer balance represents more than 20% of your total debtors ledger. Generally, when one customer exceeds 25% – 30% of the ledger, the level of normal funding may be reduced.

    Most businesses in many industries easily qualify for cash flow finance.

    Q. What about Start-Up Businesses?

    A. Debtor finance is able to assist new business ventures. Ideally, your annual credit sales should be exceeding $200,000 (or be able to reach this level in the short term). Invoice discounting tends to be suited to more established businesses.

    Q. Do I need to provide Real Estate Security?

    A. Debtor finance is secured primarily by your debtors’ ledger. Real estate security is not required and this is a major point of difference when making comparisons with other types of finance.

    Q. What are the costs?

    A. Invoice Discounting - the discount charge is typically calculated daily on the actual amount of funds drawn from your facility, together with a management fee calculated against the value of your invoices submitted for discounting.

    Factoring - in addition to the discount charge, factoring involves an administration fee. The administration fee is like an outsourcing cost for having your debtor administration tasks handled in a professional and time-efficient manner. Amongst other things the amount of this fee will depend on the number of debtors and invoices factored.

    The debtor finance industry in Australia is a very competitive market, and you should obtain a number of quotes from DIFA members.

    Q. What does Outsourcing my Debtor Administrator mean?

    A. The full debtor administration service includes the preparation and mailing of monthly statements to your customers, issuing reminder letters and follow-up telephone calls (if necessary), the receipt and allocation of customer payments, and the recording and resolution of customer disputes.

    Detailed reports are regularly prepared for you by the factor, which keep you fully informed on the status of your customer accounts.

    The investment in time and labour, which your business is currently spending on these tasks, can be significantly reduced.

    Q. What will my customer think?

    A. With invoice discounting your customers will not be aware of any difference. Your invoices make no reference to the discounting company and payments continue to be made payable to you. You continue to be responsible for the follow-up of customers for payment.
    With factoring your interaction with your customers will remain much as before. The factor’s role is simply to put the administrative side of your relationship on a more professional footing to ensure there is a timely follow-up of the customer for payment, and to properly record payments received from customers.

    Q. Is there a Minimum Period?

    A. The period of the agreement varies between financiers and you should establish these conditions at the outset of the facility.

    Q. Who sets Credit Limits?

    A. The setting of customers credit limits is left entirely to you. The factor/discounter will advise you when it believes you are over extending credit to a specific customer, and this is to assist you with your credit control, and hopefully help you avoid unnecessary bad debts.

    Q. What about Bad Debts?

    A. Debtor finance is not a solution for your bad debts, and you need to separately address this issue.

  • Brief Definitions


    The Debtor and Invoice Finance Association of Australia and New Zealand Inc was formed in 1994, under the name of the Institute for Factors and Discounters of Australia and New Zealand (IFD) and represents the interests of the major providers of factoring and discounting in Australia and New Zealand.

    What is Factoring and Discounting

    Factoring and discounting, also known as cashflow or debtor finance, are among the most powerful financial tools available to business.

    Invoice Discounting simply involves a business turning its unpaid invoices into cash. The business literally sells its unpaid invoices to the discounter.

    Factoring involves the sale of a business’s unpaid invoices as with discounting, but in addition the sales accounting functions may be provided by the factor, who manages the sales ledger and collection of accounts.


    Discounter – Company buying the debt
    Factor – Company buying the debt
    Client – Business selling the debt
    Debtor – Party liable for paying the debt
    Debt – Trade debts payable by the debtors

    Discounting: The sale by a business (the client) and the purchase by the discounter of trade debts on a continuing basis. The client retains the sales accounting functions and is responsible for collection of the debts. The debtors are usually unaware of the involvement of the discounter.

    Factoring: The sale by a business (the client) and the purchase by the factor of trade debts on a continuing basis. The factor will carry out some part of the sales accounting function, as agreed between the client and the factor. The debtors are aware that all the debts have been assigned to the factor, and that payment must be made to the factor to discharge the debt.