NLG Leasing's director of aggregation services reveals all on debtor finance and how broker clients can use it as a tool to alleviate cash flow.
Debtor finance is an umbrella term used to describe a process to procure finance using a business’ accounts receivable ledger as collateral. It can be particularly beneficial to companies that experience longer trade terms or that experience corresponding cash-flow challenges (such as seasonal fluctuations in staff requirements or working capital expenditure). These may include companies in the fields of transport, wholesale, construction and labour hire.
Debtor finance funds invoices, improving a business’ cash flow and placing it in a better position to promptly pay operating expenses (which in turn helps facilitate growth). Common terms used to describe debtor financing solutions include invoice discounting, factoring, cash-flow finance, invoice finance and working capital finance.
We’ve seen a significant uptake in utilising debtor finance. Here are a few contributing factors to its popularity:
- It’s an alternative to an overdraft: Debtor finance is an alternative to an overdraft, with it being much quicker with fewer lending restrictions.
- It’s fast: Funds can often be acquired within 24 hours.
- It’s partially secured: Security requirements vary but traditionally focus on the value of the debtors’ ledger and may be supported by a pledge of specific assets as collateral, along with the personal guarantees of directors. Real estate security is not typically taken.
- It’s straightforward: Debtor finance transactions are straightforward. The client submits its accounts receivable ledger to the finance company. The finance company processes the ledger and remits the funds to the client's bank account. Lenders often finance a percentage of the ledger (usually 70 per cent to 90 per cent) and hold the rest as a reserve. The percentage of the ledger that is financed varies and is based on the industry and risk profile of the client. The reserve is remitted less fees to the client once the advances settle (when debtors pay their outstanding invoices).
- It can be confidential: Debtor financing is typically undisclosed/confidential, whereby the customer or end-user is unaware of the funding being provided. Alternatively, debtor financing may be disclosed, which allows the finance company to fund most businesses including those with tax arrears or going through a financial restructure.
- It’s flexible: Debtor finance can be applied to a whole or part of a ledger. We find that businesses often favour financing a portion of a ledger, or even just on one invoice. For instance, we recently had a construction company approach us to obtain debtor finance on one invoice of $60,000 to release funds to purchase more equipment and materials for a new build.
- It can be utilised by businesses of all sizes: Debtor finance can be used to release cash flow to benefit start-ups through to large corporates with facilities of above $100 million.
- It’s competitive: Debtor finance is a highly competitive field, with multiple lenders offering competitive rates and terms — which ultimately benefits the end client.
We encourage brokers to consider debtor finance to extend their service offering, and in the process ring-fence clients, deepen relationships and get a competitive advantage in a highly aggressive market.
Frank Crombie is director of aggregation services at NLG Leasing which is an established provider of asset finance, and is only available to the financial services industry (with no direct consumer channels).
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