Debtor Finance is not a dirty word…! (Part 2)

Rob Kirkpatrick


In my last blog, I looked at what debtor finance is, how it works and the benefits of using this product. Based on the comments I received, I thought I’d continue the conversation.

While the comments were generally supportive of debtor finance, it was phrases like ‘expensive product’, ’a short-term band-aid’, ’use it for what it is then exit’, ‘used to overcome problems of negative operational cash flow’, ‘the impact it may have if your major customers are aware’, that gave me the impression that the experiences were mainly with businesses that had been under stress or at risk.

These comments don’t fully reflect the range of debtor finance product options available and there are many variations of this product allowing for creative solutions for all types of businesses.

With that in mind, here is an overview of what I see as the current market segmentation of debtor finance in Australia for varying risk profiles of companies.

Low Risk Company:

  • Confidential invoice finance facilities available to good, profitable companies with all taxes and statutory payments up to date
  • Clients are not notified
  • Lenders could be a major bank or large invoice finance company
  • Interest rates, fees and charges are at the lower end*
  • Minimum contract term of 12 months.

Medium Risk Company:

  • Available to companies that may be profitable
  • Taxes and statutory payments may not be up to date but could be paid out with this facility
  • May be a confidential or a “co-operative” invoice finance facility
  • Clients are not necessarily notified
  • Lenders would generally be independent invoice finance companies
  • Interest rates, fees and charges are in the mid-range*
  • Minimum contract term of 12 months.

High Risk Company:

  • Available to companies that may be in some form of stress
  • Taxes and statutory payments could be in arrears and the company may be on a payment plan with the ATO
  • Typically this would be a disclosed factoring facility
  • Clients are notified and collections are done via the finance company
  • Lenders are independent invoice finance /factoring companies
  • Interest rates, fees and charges are in the high range*
  • Minimum contract term of 12 months.

Specialist Funder:

  • This product would be used strategically for one-off situations in a time of crisis or when there is a short-term cash requirement
  • Disclosed single invoice finance facilities available to a wide range of companies
  • Clients are notified
  • Lenders are specialist funders
  • Interest rates, fees and charges are expensive*
  • No minimum contract term.

* Interest rates and facility fees for each product type will vary but generally correspond to the risk rating of each particular deal. Therefore, you may have a lender offering different pricing for two similar businesses, even though they may both be seen as low risk and eligible for the same confidential facility.

Debtor Finance Solutions

At Vantage Performance we see situations at either end of the spectrum where debtor finance is an option. The product has many variations and we have successfully used it in a number of very different situations.

In one case we had a mining services client that was in dispute with its customer. With considerable tax arrears and equipment finance arrears, the existing bank would not extend further credit. We were able to convince the bank to allow us to use a specialist funder which enabled the company to receive almost $1.6M from a large single invoice.

In another case, a well-established client with $25M turnover was growing but its operations were hampered by an overdraft limit of $1.5M (secured by commercial property). By switching to a confidential invoice finance facility with a major bank, they accessed a new limit of $2.5M at no greater cost than the overdraft. In the process, the directors were able to release the property security.

In today’s world where funding is increasingly difficult to access, it is likely that many companies could get alternative funding through one of these lenders. Yes, customers may need to be notified, but far better that occur than hamper growth due to insufficient working capital. Or worse still have to wind down a perfectly good business.

If you have any questions about how we can help your business access the right funding, please don’t hesitate to give me a call.

Rob Kirkpatrick is a Client Director at Vantage Performance – an award-winning, national business transformation and turnaround firm with proven success in solving complex financial, operational and people performance issues. 

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