“Will my customers need to know?” is one of the first questions asked by people considering debtor financing.
It’s a reasonable question because in the past debtor financing (aka factoring, or invoice finance) was associated with struggling companies and no business owner wanted customers to think they were “going broke”.
However, these days debtor financing is aimed at helping strong businesses grow stronger. So, there shouldn’t be a stigma attached to using this valuable business tool – at least in a logical sense.
The fact that it is a $60 billion industry and some very successful companies use it supports that view.
In Australia, 90% of all debtor financing arrangements are discrete. Which means your customers don’t know that you are financing your invoices.
However, discretion comes at a cost.
Because it is riskier than disclosed lending you will pay more for the service.
The hurdles will also be higher. Companies providing this facility – generally known as invoice discounters – will want you to be an established business with an annual turnover of more than $750,000.
You also need to be profitable with a record of good management and no major credit issues.
Your business must have a minimum number of customers and, if payments are overdue, you’ll be expected to act very quickly to recover the debt.
Most lenders will require you to sell all your invoices over a 12 month period, though some will consider selective invoice discounting – which means you can choose which invoices you want to sell.
Your customers will pay the invoices into an account controlled by the financier.
Not all businesses meet the criteria for a discrete facility, so your customers will need to be told that your invoices are being financed.
There are two types of disclosed products.
In the first type, you retain control over your ledger, accounts and credit functions.
The second type involves handing these functions to the financier.
This is commonly known as factoring and is suited to younger companies with a relatively small number of employees.
In this case, the financier will issue invoices, collect payments and chase slow payers.
While your customers will know that you are factoring invoices, you can be confident that someone is making sure you get paid for your work in a timely manner.
Lenders in this space will also insist you have multiple debtors, a reasonably strong turnover and good financials.
Recently, there has been a growth of hybrid facilities such as single invoice finance. In this type of arrangement, you can sell a single invoice to a financier without any commitment to continue the relationship once the invoice has been paid.
It’s great if you just need a one-off hit of cash to get through a rough period.
The facility will be disclosed to your customer and payment will be made into the financier’s account, but you are responsible for managing the debt.