For any business owner, the anxiety of delivering a service or product but having to wait for cash as bills become due shows the constant struggle of working capital. Your staff and suppliers need to be paid today, but your big customer won’t pay their invoice for another 30, 60, or even 90 days.
This constant gap between invoicing and getting paid can be an absolute killer for a growing business. It’s this realisation that leads business owners to searching for better ways to manage liquidity, and that’s often when they first come across the term Debtor Finance.
It’s also widely known as Invoice Finance or Accounts Receivable Finance. It’s one of the fastest-growing and most accessible funding solutions for Australian Small to Medium Enterprises (SMEs). In this blog, OptiPay will break down debtor finance: what it is, how it works & whether it’s right for your business.
Table of Contents:
- What is Debtor Finance?
- 4 Steps: How Debtor Finance Works
- Factoring vs. Discounting: Two Main Types of Invoice Finance
- Is Debtor Finance Right for Your Business?
- The Advantage of Modern Debtor Finance
What is Debtor Finance?
Debtor Finance is best understood as a fast-track method of unlocking cash that’s already sitting in your outstanding invoices. Instead of waiting for your customers (the debtors) to pay their bills according to their payment terms, a finance partner steps in and gives you the bulk of that capital immediately.
Your accounts receivable ledger, which is the working capital owed to you, is a valuable business asset and through debtor finance, you are able to leverage that asset as security to asset funds.
It’s a flexible working capital solution because the funding available to you grows as your sales increases. As you issue more invoices, the amount of funding available to you automatically increases, unlike many traditional bank loans where the limit is fixed and requires a review process to increase.
Also, the security for this financing is tied to your invoices, not your personal property, real estate, or other tangible assets.
4 Steps: How Debtor Finance Works
The process is specifically designed to be quick and smooth, ensuring businesses can cover daily operating expenses, jump on sudden growth opportunities, or manage seasonal fluctuations without delay. The process typically unfolds over four main steps:
Step 1: Deliver and Invoice
The business process starts exactly as normal: you complete a job, deliver a product, or provide a service to another business (B2B sales). You then issue your customer their invoice with your standard payment terms, for example, 30-60 days.
Step 2: Submit the Invoice and Get Your Working Capital Advance
Instead of waiting 30-60 days, you submit a copy of that new invoice to your chosen debtor finance provider. Once the invoice is verified, a process that is often digital and can take less than 24 hours, the provider will transfer you up to 90% of the invoice amount.
Step 3: Wait for Your Customer to Pay
You now have the cash in your account, ready to pay wages, purchase inventory, or invest in new equipment. Your customer is still obligated to pay the full invoice amount according to the original payment terms and they’ll pay it into your nominated account.
Step 4: Receive the Remaining Balance
Once your customer’s full payment is received by the finance provider, they release the remaining percentage of the original invoice value to you. From this final amount, they subtract a pre-agreed fee. This fee is the primary cost for using the service, and because it’s based on the value of the invoice and the time outstanding, you only pay for the working capital you actually use. The facility is self-liquidating; there are no fixed weekly or monthly repayments; it’s simply repaid when your customer pays their invoice.
Factoring vs. Discounting: Two Main Types of Invoice Finance
When looking into debtor finance, you’ll encounter two main terms: invoice factoring and invoice discounting. The fundamental difference between them centers on confidentiality and who handles the collections.
The first type is Invoice Factoring (Disclosed). With factoring, you are essentially selling your invoices to the finance provider, known as the ‘Factor.’ The Factor takes over legal ownership of the debt and, more importantly, they take over the collection process. For this model, your customer is made aware of the arrangement and pays the Factor directly.
Factoring is best for smaller businesses that may not have a dedicated accounts department or owners who want to outsource the time-consuming and often awkward task of chasing payments, as it functions as an outsourced collections and credit management team.
Then there’s Invoice Discounting (Confidential). With discounting, you are simply borrowing against your invoices, which are used as security. So you retain ownership of the invoices and you retain control of invoice collections. Under this model, your customers will never know you are using a finance facility because they continue to pay your business as normal.
Discounting is best for businesses with a strong internal credit control team who need immediate cash flow but want to keep their customer relationships strictly confidential. This is the highly flexible and discreet service often preferred by growing SMEs.
Is Debtor Finance Right for Your Business?
Debtor finance is a great working capital tool but it’s not a silver bullet for every financial challenge. It is specifically suited to certain business models. The ideal business for debtor finance is one that sells to other businesses (B2B), as the facility only applies to commercial invoices, not retail sales. The company must also experience customers habitually paying in 30, 60, or 90 days, which ties up working capital.
Typically, the business is growing because as sales increase, the need for capital to fund operating costs (wages, tech, etc.) grows faster than the incoming cash. In this scenario, a debtor finance facility scales automatically with the invoices, directly supporting expansion.
It’s also suitable if you need non-property-secured finance, allowing access to funds without offering personal assets as collateral.
Finally, it’s perfect for businesses that experience seasonal cash flow fluctuations where peak seasons require rapid scale-up, or slow periods where a flexible finance facility can bridge gaps.
The Advantage of Modern Debtor Finance
Modern providers have specifically tailored their solutions to remove the typical barriers and rigidity of traditional bank finance. They understand that a business doesn’t operate on a fixed monthly schedule, and its finance shouldn’t either.
Their approach is built around flexibility and speed. They can typically advance up to 90% of your invoice value, often depositing the funds within 24 hours of verification.
Debtor Finance provides high-growth B2B companies with a vital, scalable source of funding, turning outstanding invoices into immediate, usable working capital. Interested in learning how this could work for you? Reach out to OptiPay to learn more.
