What is Invoice Finance & How is it Different from Debtor Finance

What happens when your customers are late in paying their invoices? It creates a gap in the cash flow of your business disrupting its financial constancy, carrying the risk of capital depletion. How to fill up that gap? Well, the business can resort to invoice financing from lenders either directly or through a finance broker, gaining access to quick funding. Don’t get it confused with debtor finance; that’s a separate genre of financing for businesses. We will come to that after explaining everything that you need to know about invoice finance.

Invoice Finance

Acquiring invoice financing or invoice discounting allows businesses to derive funding against the pending invoices of the customers/clients. It is one of the most sought-after ways for businesses to bridge the gap in the cash flow caused by pending invoices. The lender would set a limit on the financing allowing the borrower to get up to 95% of the pending invoice amount.

After the customers/clients have paid the invoices in full, the lender pays off the balance withheld amount net of interest and other charges.

Eligibility for Invoice Financing

• The borrower or, rather business, should have an active ACN or ABN.
• Pending invoices should be against Australian businesses.
• The borrower must provide proof of delivery against the issued invoices.

Required Documents for Invoice Financing

• Bank statements going back 6-12 months.
• Invoice sample along with proof of delivery.
• ATO statement.
• Financial documents, stating the receivables ledger.

Benefits of Invoice Finance

• It helps the business owner to replenish the capital for any depletion caused by the pending invoices.
• Since the funding is acquired against the outstanding invoices, generally, there is no need for additional security or collateral.
• The borrower can acquire a higher loan limit since invoice finance is secured against the invoices. One would have to pay the interest of only funds utilized.
• If the customers settle the invoice soon enough, then the borrower can save by paying less interest.
• Since the financing is not registered in the balance sheet, the overall financial status of the business remains unbothered.

Comparison between Invoice & Debtor Finance

Now, coming to the difference between invoice and debtor finance! Debtor finance or debtor discounting enables a business to acquire funding or financing capital against the accounts receivable. It might seem to be similar to invoice finance, but that’s hardly the case. We have explained the difference between the two below:

INVOICE FINANCE

DEBTOR FINANCE

• The monthly invoice activity is assessed to determine the fund limit.
• Requires the borrower to submit the proof of delivery against invoices.
• The borrower is required to submit the invoice against each usage of the financing.
• The lenders do not consider invoices that have progressive payments.
• The limit is deduced by assessing the accounts receivable ledger.
• There is no need to submit proof of delivery.
• Periodical submission of the accounts receivable ledger suffices.
• Funding can be only acquired against debtors aging less than 90 days.

Conclusion

Hopefully, we were able to clarify your confusion concerning invoice finance and debtor finance. Make sure that you get it from a trusted lender ready to offer you a feasible amount against favourable interest rates. You can always get in touch with a reputed finance broker for options in terms of financing products offered by different lenders.