Debtor finance is a form of business funding which allows companies to overcome the cash flow issues that may be holding them back. It does this by way of an advance or a line of credit secured against their outstanding invoices.
It can get a little complicated as debtor finance goes by many names (such as invoice finance and receivables finance) and comes with a whole host of jargon.
Factoring and Discounting
All you need to know is that there are two mains, which are really quite similar, invoice discounting and invoice factoring.
- What they have in common is:
- They both help solve working capital problems, usually caused by the payment terms on invoices (often 30-60 days)
- The amount of available funds increases as the business grows
- Funds are available quickly, usually within 24 hours
- The application process will focus on the creditworthiness of the applicants' debtors as much as the business themselves
- A proportion of the invoice will be advanced followed by a rebate (less any fees and charges) once the invoice is paid
- Generally, the entire accounts receivable ledger is funded by the finance company. Although a type of factoring (known as spot factoring) allows for single invoice / customer funding.
The key difference is that with invoice factoring the unpaid invoices are sold to the lender, who takes over responsibility for collections. With invoice discounting, the invoices are used as security for a loan or line of credit. The lender stays in the background the debtors are usually unaware of the finance facility.
Both have positives and negatives and often it depends on the type and size of business as to which is right. Let’s look at the pros and cons.
Pros and cons of discounting
|Quick access to working capital||Usually for more established companies|
|The credit limit increases as the invoice ledger does||Unlike factoring, no help with collections (a pro and a con!)|
|No fixed assets as collateral||All invoices are usually funded, leaving little flexibility|
|Non-disclosed so client relationships remain with the business||Available funds limited by the value of invoices|
|Short term option without long contracts|
|Cheaper than factoring|
Pros and cons of factoring
|Quick access to working capital||More expensive than discounting|
|The credit limit increases as the invoice ledger does||Available funds limited by the value of invoices|
|No fixed assets as collateral||Stringent terms and conditions leave little flexibility (often 24 months contracts)|
|Help with credit control and admin is useful for small business owners||It exposes your financial situation to your customers|
|Available to smaller, less established businesses||It comes with a somewhat negative reputation|
The Waddle Difference
Waddle offers the best of both worlds. We are not factoring or discounting, but a modern form of invoice finance. We've built an innovative receivables finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.
Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.
It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital with minimal fuss. Get an offer now!