What is Debtor Finance and how does it work?
Everything you need to know about debtor finance and how it could benefit your business.
Cash flow pressure can show up at any time of year. Delayed customer payments, rising operating costs, seasonal demand, and the need to invest in stock, wages or business growth can all put pressure on working capital.
Even profitable businesses can run into cash flow challenges when money going out moves faster than money coming in. When invoices are paid later than expected, that gap can make it harder to cover day-to-day costs and keep the business moving.
Debtor finance, also known as invoice finance or accounts receivable finance, is designed to help businesses manage these periods more effectively. It allows business owners to unlock cash tied up in unpaid customer invoices, providing earlier access to funds without having to wait for payment terms to run their course.
What is debtor finance?
Debtor finance is a type of working capital finance that lets businesses access funds against unpaid invoices. Rather than regular loan repayments, the funding is repaid as the business's customers pay their invoices. Bringing forward this cash flow can be useful for covering operating expenses and maintaining ongoing positive working capital when cash flow is tight.
With debtor finance, a business can typically draw up to 80% of its accounts receivable ledger ahead of payment. Because the accounts receivable ledger is the primary security, business owners typically don’t need to use property security, such as the family home.
How does debtor finance work?
Debtor finance works by using eligible unpaid invoices as the basis for funding. Once the invoice has been verified, a lender like Earlypay can provide an advance, typically around 85% of the invoice value.
Since customer invoices serve as collateral for debtor finance facilities, the lender will require an accurate and up-to-date view of the accounts receivable ledger. Platforms like Earlypay seamlessly sync to accounting software to provide a real-time overview of the outstanding customer invoices.
Debtor finance in action
Having access to cash before your customers have paid their invoices can make a real difference when cash flow is under pressure. For one transport operator, slow-paying customers were making it harder to cover day-to-day costs at a time when he was also dealing with significant personal and financial pressure.
Earlypay helped by putting funding in place across unpaid invoices and unencumbered equipment, giving the operator access to $455,000 in working capital. That gave him the working capital to pay suppliers and keep covering wages and fuel costs, while continuing to take on new work. With cash flow stabilised, he was able to regain control and focus on growing the business again.
Learn more about how Earlypay helped this transport operator get back in the drivers seat.
The benefits of modern debtor finance
Modern debtor finance providers like Earlypay integrate with Xero and MYOB. This means invoices can be viewed automatically and in real time, saving time for business owners and their teams. With this connected integration, both the lender and the borrower have a clear view of available funding, while invoice payments and funding transactions are automatically reconciled.
Different types of debtor finance
Within invoice factoring and invoice discounting, there are two further groups of debtor finance, based on which invoices are used to access funds.
- Full ledger. This is where the entire accounts receivable ledger is used to access finance. This maximises the amount of debtor finance that can be accessed, as all of the accounts receivable can be drawn against.
- Partial ledger. This is where you draw funds against less than all of the accounts receivable ledger. This can range from single invoice finance, where only one invoice is financed from the whole ledger, to all of the ledger except for one customer.
Often, debtor finance facilities (invoice finance facilities) operate as a line of credit, and the available limit increases as invoices are raised and reduces when they are paid.
Will my customers know that I’m using a debtor finance facility?
Not necessarily. It depends on the type of debtor finance facility in place.
Some debtor finance arrangements are disclosed, which means your customers are aware of the facility and make payment into an account set up for that purpose.
Others are confidential, which means your customers continue dealing with your business as usual and are not aware that a funding facility is in place.
The right structure depends on factors such as your business, your customers, and how the facility is set up. For some businesses, a confidential facility may be available, while for others, a disclosed structure may be more suitable.
If this is an important consideration for your business, our team can talk you through the options and help determine what may be possible.
More benefits of debtor finance
As well as accelerating cash flow from invoices, debtor finance also provides certainty around timing, as invoice payments are often difficult to predict, and sometimes take longer than they should. Debtor finance is repaid immediately when customers' invoices are paid, so there are no regular repayments required from the business.
It can also be a practical way to access business finance in line with the cash flow capacity of the business, as funding is linked to the value of unpaid invoices rather than a fixed loan amount. Many businesses prefer this to traditional business loans, where repayments, fees and interest are payable on a set schedule regardless of how cash is moving through the business.
How much debtor finance can I get?
The amount you can borrow using debtor finance is linked to the value of invoices that are eligible for finance. Most lenders consider eligible invoices to be:
- For goods or services that have been completed (invoicing in arrears)
- Made out to customers with a good credit standing
- Less than 90 days past the invoice issue date
Am I eligible for debtor finance?
Eligibility for debtor finance depends largely on the quality and structure of your invoicing.
At Earlypay, we generally look for businesses that:
- have a valid ABN
- operate business-to-business (B2B)
- issue invoices on credit terms
- invoice in arrears, after goods or services have been delivered
- have a clear paper trail to support the invoices being funded
This helps ensure invoices can be clearly identified, verified and funded appropriately.
Is debtor finance right for my business?
Whether debtor finance is right for your business will depend on factors such as your business model, size, circumstances, and what you need the finance for. If you’re looking to improve working capital and unlock cash tied up in unpaid invoices, debtor finance could be the right fit.
With more business finance options now available, choosing the right structure matters. Our team can help you assess your options and work out whether debtor finance is a suitable solution for your business.
When debtor finance may not be the right fit
Debtor finance can be a strong working capital solution for many businesses, but it is not the right fit in every situation.
It may be less suitable where:
- Debtor quality is weak
If your customers have a poor payment history, weak credit profiles, or frequent delays, the invoices may not be suitable for funding. - Billing disputes are common
Debtor finance generally works best where invoices are clear, accurate, and unlikely to be disputed. Industries with frequent disputes, offsets, or adjustments may be less suited. - The business does not invoice on standard credit terms
Businesses that rely on consumer sales, milestone billing, or upfront payments are often better suited to other funding structures.
That said, not being the right fit for debtor finance does not mean there are no options. In some cases, another type of funding, such as equipment finance or a broader working capital solution, may be more appropriate. The key is finding a structure that fits the way your business actually operates.
A practical way to improve cash flow
Debtor finance can help businesses access funds tied up in outstanding invoices, making it easier to manage working capital and keep the business moving.
If you’d like to explore whether Earlypay’s Debtor Finance facility is right for your business, contact our team today on 1300 760 205.
