3 key factors behind the rise of debtor finance in Australia

December 14th, 2020

Why debtor finance is becoming increasingly popular in Australia.

The use of Debtor Finance in Australian is growing quickly as business owners see the value of using their accounts receivable to access funding. Debtor finance can be a great tool for providing the cash flow and working capital Aussie businesses need to grow.

But what is it about debtor and invoice financing that has pushed this rise in popularity? Let’s explore just how this financing model has evolved for modern working conditions and why more and more companies are turning to it to help with stagnant cash flow problems

What is debtor finance?

Debtor, or invoice financing, involves the leveraging of value in unpaid invoices through an invoice financing company to obtain cash. The business is paid up to 90% of the value of their invoices with the total balance paid (less any fees) once the debtor pays in full.

Debtor finance has undergone a steady rise in Australia. Statistics from the Debtor and Invoice Finance Association (DIFA) show that in the March quarter of 2017, total debtor financing was up 4.3% on the year before. This forms part of a trend that has seen total annual industry turnover rise from less than $25 billion in 2010 to nearly $40 billion in 2017.

There are some key reasons for this growth, and understanding them can help businesses access the cash flow they need to thrive.

The growing popularity of debtor finance

1. Companies are working on longer payment terms

In recent years, we've witnessed a trend in which companies are demanding more time to pay their debts. Instead of taking 30 days, they're asking for 60 days or 90 days. And because the SMEs rarely have much leverage in these negotiations, they usually accept - which can lead to a cash flow gap. 

Research from Xero revealed that 83% of small businesses struggle with big businesses paying them on time. By agreeing to longer payment terms, SMEs can find their cash flow grinds to halt, strangling their growth prospects. 

Debtor finance allows business to continue to grow without waiting in limbo to be paid by giving you funds already owed to you. In fact, debtor financing is considered one way that small businesses can compete with the industry giants

2. Macro-prudential lending restrictions

Concerns about residential lending have had a significant impact on business operators in Australia. Guidance from the Australian Prudential Regulatory Authority and the Reserve Bank of Australia has seen lenders increase capital requirements, lending restrictions or criteria, and interest rates. The impact for businesses is that overdrafts or business loans can be more difficult to secure, pushing companies to find alternative funding options like debtor finance.

While these restrictions have since been encouraged to relax, as the RBA cash rate plunges to a new record-low of 0.10 per cent, banks still seem unwilling to lend to Australian small businesses and alternative finance like debtor finance is seen as a saviour for many businesses. 

3. More widespread awareness of debtor finance

Another reason debtor finance is more popular is that, quite simply, more people know about it. Just 10 years ago it was a niche market, but more and more SME owners have come to understand the value of getting financing help outside of traditional channels. In fact, it’s growing popularity in the UK might have been an influence on this in Australia, helped by the fact that it is a source of funding that doesn't rely on real estate security.

Although every provider of funding is different, the Earlypay model embraces technology to remove many of the manual processes involved with debtor finance in the past. Features such as real-time connectivity with online accounting platforms including Xero, MYOB and Quickbooks and an simple-to-use online platform are making debtor finance easier and more accessible than ever before.

If you'd like to learn more about how Earlypay can tailor a fast and flexible invoice financing arrangement that works for you, contact us on 1300 760 205 or email us at [email protected] to find out more. 

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].