Debtor finance

Debtor finance is an umbrella term used to describe a process to fund a business using its accounts receivable ledger as collateral. Generally, companies that have low working capital reserves can get into cash flow problems because invoices are paid on net 30 terms. Debtor finance solutions fund slow-paying invoices, which improves the cash flow of the company and puts it in a better position to pay operating expenses.

Types of debtor financing solutions include invoice discounting, factoring, cashflow finance, asset finance, invoice finance and working capital finance.

Most businesses have to offer credit terms, usually of 30 days, in order to secure orders from customers. Current statistics show that these invoices can take up to 60 days to be paid. This delay reduces essential cash flow and restricts the growth of the business.

Security requirements vary, but traditionally focus on the value of the debtors ledger, supported by a pledge of specific assets as collateral and a charge or mortgage over the business, along with the personal guarantees of directors. Apart from some specialised lenders, real estate security is not taken. By focusing on the value and collectability of the accounts receivable ledger, most debtor finance credit lines will automatically increase in response to increases in sales, and provide ongoing working capital to fund the growth of the business. Typically the advance rate ranges from 70% of accounts receivable ledger value up to 90%. The remaining 30% to 10%, known as the 'retention' is released following receipt of payment of each invoice by the customer/debtor/buyer.

Debtor finance products, by whatever name, essentially fall into two categories:

Export factoring is a highly specialised and selective form of factoring, and can provide non-recourse funding to exporters, paid at the time of shipment, and with solvency of the overseas importer underwritten by an overseas bank or institution.

...
Wikipedia