If your business has had to deal with cash flow problems, you’re not alone. In fact, only about 50% of small businesses in Australia are cash flow positive in any given month. Of course, this raises vital questions about how business owners can pay their overheads, buy inventory, and grow their businesses without taking on more debt.

Increasingly often, the answer is debtor financing.

Although debtor finance encompasses a range of solutions, its two most common forms are invoice financing and invoice factoring. Although both methods can provide capital without adding to your long-term debts, there are a few important differences to consider when choosing the right financing option for your business.

Invoice financing
Invoice financing companies simply provide a cash advance based on your unpaid invoices. You can receive anywhere between 70-90% of the amount owed, upfront, in as little as a day. You then receive the remaining amount, minus fees from the financing company, once the invoice has been paid.

Invoice factoring
Invoice factoring works in a very similar manner, except that invoice factoring companies take on the responsibility of settling your invoices, and will interact directly with your customers in order to do so. Whoever assumes the risk of unpaid invoices will depend on whether you choose a recourse or non-recourse service.

Benefits of debtor financing
Traditional loans involve long-term debts which usually have to be carried on the balance sheet for over a year; debtor financing simply fast-tracks your access to money that you’re already owed, which means you can gain more capital only when you need it. Debtor financing also has fairly simple qualification requirements, especially compared to business loans and overdrafts, which makes it a much more accessible option for businesses with lower revenue or credit ratings. And, unlike other types of business lending, debtor financing offers a steady stream of revenue without involving interest rates or secured assets.

Choosing the right solution for your business
Both of these solutions are ideal for seasonal businesses, or those with customers who require longer payment terms. Invoice financing is extremely useful for small businesses, such as freelancers, who can’t always afford to wait out revenue slumps. However, it’s also a good idea for anyone with large clients, such as government agencies or corporations, who can be notoriously slow to settle their invoices.
While invoice factoring would also help in the above circumstances, it also leaves the collection of payments, and the management of your sales ledger, up to the finance provider. Although this is clearly a bonus for anyone who doesn’t want to spend their time chasing payments, some customers might not like discovering that your invoices are being managed and collected by a third party. For this reason, invoice financing is generally favoured by businesses who want complete confidentiality and control over their own sales ledger operations.

Other debtor financing tips

  • Have a clear ROI plan in place. Before you request an advance on your invoices, make sure you know exactly how this capital will help your business. The quick turnaround of most debtor finance services will allow you to plan your future expenses quite accurately and confidently.
  • Put your cash to work. If you ever find yourself with extra capital, put it in a high-interest business savings account. That way, you can earn a competitive interest rate on every spare dollar you have, and still withdraw funds whenever you need to.
  • Conduct regular cash flow forecasts. Cash flow forecasts can highlight any cycles in your business and help you identify potential cash flow shortages in the future. This invaluable information can help you optimise your staffing, time your borrowing, and boost your marketing efforts during lulls.

Krystal at Waddle Digital Marketing Team