How does Debtor Finance Work?

A Debtor Finance Facility is where a loan is raised for working capital purposes using a customer’s debtor book (accounts receivable) as security. This type of finance is an alternative to an overdraft facility of which is secured by property. This form of financing is experiencing high growth in Australia and is moving forward with great popularity.

Debtor Finance Graph

Features of Debtor Finance Facility

  • customers can raise a loan using their outstanding debtors list as security
  • funding limit can be between 80% to 100% of the value of the debtor list
  • funds are deposited into clients account the day after the invoice is issued by the client
  • this product is an alternative to a traditional overdraft facility

Benefits of Debtor Finance Facility

  • business owners can use property assets to grow personal wealth without tying such assets to the business
  • facilitates business growth in the event that other funding options (i.e. overdraft) are not available
  • debtor finance facilities place less stress on cash flow due to rapid sales growth of a business
  • once a facility has been approved, there is no need to re-apply for a higher limit, as the facility increases commensurate with rising sales
  • no need to wait 30-90 days to be paid by suppliers as funds are received as soon as an invoice is issued
  • given the fact a debtor finance facility increases commensurate with sales; this product allows client to make payments to creditors due to a rise in rapid sales growth

Example of a Debtor Finance Facility

  • Earthmoving contractor required access to additional funds required to meet working capital demands relating to a new work contract – proposed turnover was $2M per month
  • Finance Type – Debtor Finance
  • Facility Limit – $1,600,000
  • Term – ongoing

Outcome

  • Client was able to secure the new contract once this debtor finance facility was approved, increasing turnover from $1.2M per month to $2M per month
  • As the security for the Debtor Finance Facility was the client’s debtor list only, they could use their property assets for other investment opportunities
  • Client has access to funds immediately without having to wait 30-90 days to get paid from their suppliers – allowing clients to easily pay wages and make payments on their earthmoving equipment finance portfolio
  • Once approved the Debtor Finance Facility will grow commensurate with the increase in sales – without having to be reassessed by our credit department

Who would use a Debtor Finance Facility?

A debtor finance product would typically be used when a business is faced with the following conditions;

  • new start venture
  • when sales growth is squeezing working capital
  • partner buyouts
  • when large accounts (such as wages or fuel) need to be paid well ahead of receipt payments from suppliers
  • when business owners do not have sufficient property equity to have a large enough overdraft facility to support increased sales growth
  • when businesses secure a new work contract that could double their turnover
  • to those that do not want to implicate personal property assets with the business

Want to ask more questions about a Debtor Finance Facility?

To discuss how a Debtor Finance Facility works in further detail, please call one of our Finance Consultants on 1300 788 740. One of our specialists Finance Consultants will be able to answer any questions you might have relating to how this product works and how cash flow finance can benefit your business.

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