Debtor finance is a financial arrangement where a business uses its accounts receivable (unpaid customer invoices) as collateral to secure funding. This solution is particularly beneficial for businesses with cash flow constraints due to slow-paying customers. Instead of waiting 30, 60, or even 90 days for payment, companies can access a portion of the invoice value upfront, ensuring their operations run smoothly.There are a few different types of debtor finance options that will suit different businesses.

Invoice Factoring

Invoice Factoring involves a financing company purchasing your unpaid invoices and advancing a percentage of their value, usually between 70% and 90%. Once the factor takes over, they manage the process of collecting payments directly from your customers. This arrangement often suits smaller businesses or those looking to streamline operations by outsourcing their debt collection. By allowing the factor to handle customer payments, businesses can focus on their core activities, though this transparency may also become clear to your customers, which could impact their perception of your business.

Invoice Discounting

Invoice Discounting provides a similar advance against unpaid invoices but differs in that your business maintains control over customer relationships and payment collections. The financing company remains in the background and your customers typically remain unaware of the arrangement. This option is especially popular with larger businesses or those that have dedicated team members for managing collections. With greater discretion and control, invoice discounting allows businesses to preserve customer confidence while unlocking the working capital needed to maintain smooth operations.

Trade Finance

Trade Finance works by directly funding supplier payments. Using purchase orders and invoices, trade finance means that your supply chain remains uninterrupted while reducing the strain on your working capital. This is particularly useful for businesses operating in industries with complex supply chains or significant upfront supplier costs. By bridging the gap between supplier payments and customer receipts, trade finance provides the liquidity required to meet operational demands without incurring additional debt.Each of these options has its own advantages and the right choice depends on your business’s size, industry, operational preferences and customer relationship management strategy.Speaking to a finance broker about your business needs is the best option to find what could support business prosperity and success.