What is debtor factoring or debtor finance?
Debtor finance is also called debtor factoring, factoring or receivable factoring. Essentially what debtor financing means is selling your debtors to a financier, who gives you a portion of the value of invoices you have raised up front. In return they charge interest and fees. When the debtor pays, they give you the rest of the invoice amount.
Debtor finance can be a very flexible form of funding. As the business grows, its debtors increase and it issues more invoices. The finance facility can grow in line with the growth of the business.
Debtors can be used to finance a business in a number of different ways from the financing of individual invoices right through to entire debtor ledgers.
What is the cost of debtor financing?
The cost of debtor finance arrangements will differ. Generally, the financier will charge a fee for the transaction and a rate of interest on the amount outstanding. de Jonge Read have strong relationships with a number of different types of financiers in this market and would be happy to arrange an introduction.
How does a debtor finance facility work?
The financier purchases the debtor/s and provides a lump sum to the business on day 1. This is usually for around 80% of the amount of the debtor. Later, when the debtor pays, the remaining 20% is released to the business. The financier charges a fee and interest on the amount outstanding until the debtor pays.
Is invoice financing a good idea?
In some cases invoice financing can be a great idea. It provides the business with an immediate injection of cash, effectively bringing forward debtor collections to give the business cash to use now. For fast growing businesses this can be an ideal way to fund growth. For businesses with mature or declining sales, this may be a short term solution to address immediate cashflow issues but may not be a good idea in the long run.
When is debtor finance an option for me?
Debtor finance is ideally suited for:
Supports businesses in the start up and early growth phases. Debtor financiers are more concerned with the future than the past and do not place the same reliance on historical financial performance and information.
Fundamentally good businesses recovering from a specific issue that has had an adverse impact on their cashflow, such as a bad debt or a loss of production.
Debtor finance facilities are stand alone, being secured by the invoices raised by the business itself and can therefore be used to complement or repay traditional bank overdrafts potentially freeing up real estate property (importantly the family home) from the security mix.
Can be used to support businesses through a formal restructure process including Administration and Deed of Company Arrangement (DOCA) where necessary.