What debtor Invoices can I finance or factor?
Clients often ask us about what types of invoices to finance or factor. Before setting up a factoring facility there are a few issues to consider including the amount of additional capital required, debtor payment arrangements and types of debts.
Factoring arrangements generally fall into one of two categories: ‘whole-of-ledger’ factoring and ‘spot’ factoring.
Whole-of-ledger factoring is exactly as the name implies - the client finances or factors all of the debtor’s ledger regardless of the terms of trade.
Generally, clients will want to fund the whole debtors ledger, but it is often agreed that some debtors are excluded or not factored for finance. There are various reasons for the exclusion of invoices from funding including:
- debtors pay COD
- debtors pre-pay with deposits
- debtors are deemed bad debts
- it is agreed there is a credit risk issue associated with a particular debtor.
Spot factoring involves the factoring of a portion of the invoices on the ledger, chosen by the client based on cash flow needed. These invoices are then provided to the invoice finance company for funding. Note, there are some pitfalls with this selective method of funding, but it can work for large invoices issues.
Often clients want to finance or factor just one invoice. This is always possible and can be an effective solution when immediate funding is required, however, it is unlikely to resolve the ongoing underlying problem of lack of cash in the business.
So, clients generally finance more or all of their invoices because they realise that factoring or invoice finance provides the cash flow needed in the business without property security. When invoices are financed correctly, cash flow is positive, and money is delivered to the client business on a daily or weekly basis.
With factoring, the general rule is that clients finance or factor debtors, not invoices, and you do not split debtors.
What this means is that if you get funding for debtor ABC Pty Ltd, for example, the client would provide all the invoices for that debtor in order to simplify the process.
Factoring is based on the premise of B2B trading, delivered goods or services and credit terms of seven days or more being offered, so it makes sense to finance all your invoices paying over seven days. These are the slow paying debtors holding back your cash flow.
Contact one of our experienced cash flow finance specialists at Australian Invoice Finance to determine the best solution for your business cash flow.