Debtor insurance: Factoring and debtor finance in Australia

Factoring – the passing off money owed to a third party in order to gain credit - is not a new concept. Invoices are offered as security in order for businesses to borrow, also sometimes termed as “invoice discounting”. Businesses wishing to free up cash flow sell money owing to them on invoices, essentially “mortgaging” unpaid business invoices to a third party to get a cash advance in return. A business providing goods or services to another business on credit can finance unpaid invoices to business customers. This is known as debtor finance, which has been a common practice in Europe and the United States for some time. But how does it affect Australians? What is the benefit of assigning unpaid invoices to a third party? Insurance Guru digs a little deeper.

Factoring and debtor finance in Australia

Businesses in Europe and the U.S. have traditionally viewed factoring as a legitimate means of managing commercial cash flow. By contrast, factoring has always been associated with business failure in Australia, i.e. last resort borrowing. Commercial attitudes have changed in this country over the past two decades, allowing factoring to be seen in a different light. Debtor finance is now seen as a genuine way for a business to juggle financial commitments. The method can grow with a business as the facility limit is set by the value of invoices rather than mortgaged property or other securities. Debtor finance products are regularly being introduced by mainstream banks to meet the newer demands for this method. As the market becomes more competitive for factoring, innovative products are beginning to meet expectations.

Australian Debtor Financing

The debtor industry in Australia has steadily grown, funding roughly $40 billion in 2005/6, growing 15-25% annually. Factoring may also be known as:

• Debtor Finance
• Debtor Lending
• Invoice Discounting
• Invoice Finance
• Receivables Finance
• Cash Flow Finance
• Current Asset Finance

Factoring lenders will generally advance between 70 and 90% of accepted invoices within 48 hours. Less lender’s fees a balance will be paid to a client once the customer has paid an invoice.
As a means of restructuring business credit, factoring can be a useful solution and a smart alternative to taking on standard loans. Whilst previously stigmatised, debtor financing is now a genuine means of efficient commercial finance structuring.