Labour hire providers, particularly those in industries like mining and industrial services, often face challenges in managing cash flow simply due to the nature of their business. With debtor finance facilities tailored for this sector, companies can overcome cash flow gaps and maintain more efficient operations.
For instance, Octet offers partnership debtor finance lines specifically designed to accommodate the needs of labour hire companies, such as this WA-based labour hire provider.
A Case Study: Octet’s partnership with a labour hire provider
In a recent partnership with Octet, a labour hire business, operating in the mining and industrial sectors, sought a working capital solution to address cash flow challenges associated with its start-up growth phase.
The Managing Director, with previous successful experience in the industry, engaged Octet’s WA Working Capital Director, Nigel Thayer, to structure a flexible debtor finance facility. Despite having only three clients initially and a modest receivables ledger, Octet provided a disclosed debtor finance solution with a $300,000 funding limit.
This implementation enabled the client to access ongoing funding based on business invoicing, supporting payroll needs and facilitating business expansion. With improved cash flow, the company found it easier to attract new clients and fulfill larger labour hire placements, resulting in promising sales growth.
Looking ahead, Octet anticipates increasing the funding limit to further support the business growth ambitions and ensure continued sustainable success.
What is Debtor Finance?
Debtor finance, also known as invoice finance, is a working capital solution designed to assist businesses in managing cash flow by leveraging their accounts receivable balance. It gives businesses quick access to cash by using their unpaid invoices as collateral, receiving a significant portion upfront via an immediate cash injection from a third-party financier, such as Octet. The financier charges a small fee to advance the funds and then collects the full payment from the customers when the invoices are due. Its appeal continues to grow, evidenced by increasing interest from businesses across various sectors.
“Octet’s Debtor Finance solution is designed to meet the business’s short- and long-term needs,” says Nigel. “We structured the facility to enable an increased level of funding that coincides with the business’s sales growth.”
The advantages of debtor finance for labour hire
Debtor financing offers several advantages for businesses similar to start-up labour hire businesses in the mining and industrial sectors:
Immediate cash flow optimisation: Debtor financing swiftly transforms outstanding invoices into accessible cash reserves. This enables start-up labour hire enterprises to efficiently address critical operating expenses such as payroll and strategic expansion initiatives.
Tailored flexible funding: Octet’s debtor finance solutions are structured to accommodate the requirements of emerging labour hire providers. This tailored approach ensures adaptability to fluctuating demand and facilitates agile responses to unforeseen opportunities, empowering businesses to navigate uncertainties with confidence.
Strategic growth opportunities: With a stable cash flow foundation secured through debtor financing, start-up and more established labour hire businesses can strategically pursue growth opportunities. This includes the confident pursuit of new client engagements, the expansion of service portfolios, and the establishment of a robust presence within the dynamic mining and industrial landscapes.
An Octet Debtor Finance facility emerges not only as a financial instrument but also as a strategic enabler for start-up labour hire businesses, offering vital support in managing cash flow dynamics and unlocking growth potential. Partnering with Octet allows businesses at any growth stage the opportunity to improve their cash flow position and more confidently grow their operation.
Says Nigel, “We don’t just look for the large transactions. We can provide debtor finance facility limits below $1 million and can include tax repayment aspects for those businesses that need it.”
Grow your business with Octet
Via our Referral Partner Program Octet empowers businesses across a range of industries, including labour hire, manufacturing and transport, offering innovative debtor finance and other working capital solutions.
Speak to our team of working capital specialists to see how we can power your business growth today.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
Maintaining robust cash flow, navigating slow sales periods or capitalising on growth opportunities are several reasons why businesses might seek additional funding sources. These businesses will discover that there are many financial solutions available, and choosing the most suitable one can be daunting.
Invoice financing, also referred to as debtor finance, is a funding mechanism that allows companies to unlock capital tied up in their outstanding B2B invoices. It’s the ideal funding solution for businesses experiencing rapid expansion.
As a business owner, if you’ve started researching invoice financing no doubt you’ve encountered a range of terms, definitions and financial products, such as invoice funding, invoice factoring, and confidential and disclosed offerings. So, what is invoice financing, what are its benefits, and how can it serve your business? We explore these questions, uncovering the financial instruments available and their role in supporting businesses across various sectors.
How invoice finance works
Efficient cash flow is vital to establish, operate and grow a business. Solid cash flow allows a business owner to sustain operations during quiet periods and seize new opportunities to expand their offerings. It’s vital for business growth and to forge strong ties with suppliers and partners by ensuring timely payments.
However, cash flow can stagnate if you experience delays in customer payments. This is where invoice finance comes into play, providing immediate access to the capital bound in your company’s outstanding invoices.
Sam Ralton, Octet’s Director of Working Capital Solutions, explains. “There are several terms for these products. Invoice finance, receivables finance, debtor finance — they all cover the same broad offering, which considers the receivables ledger or the outstanding invoices, and facilitates funding against them.”
There are primarily two approaches to financing outstanding receivables and ensuring a consistent cash flow: invoice factoring and invoice discounting. Let’s delve deeper into these methods.
What is invoice factoring?
Invoice factoring is a form of invoice finance where you bring your B2B accounts receivable to a financing company. This financier then provides you with a substantial portion (typically up to 85%) of the invoices’ value immediately in exchange for a small fee.
The financing company takes over collecting and processing payments from your customers or clients. After the financier has recovered the amounts due, they will forward the remaining funds to the business, deducting a nominal service fee.
By transferring the debt collection task to a finance company, you may reduce administrative expenses and free up your team’s time. The drawback is having slightly less control over some operational interactions with your clients.
Factoring services often include the management of the sales ledger, such as allocating payments and issuing statements and reminders. As a result, the costs might be higher than other invoice finance services. It’s also apparent to your clients that a third-party financier is involved, as they will direct their payments to the financier.
Sam says you probably won’t hear the term ’factoring’ in contemporary finance as reputable finance providers like Octet offer more tailored invoice finance solutions and collaborative partnerships. “Invoice factoring used to be fairly intrusive. Businesses found they had to hand in every invoice, and the financier would chase up the debts.
“At Octet, we have finance relationship managers who are constantly collaborating with clients to identify cash flow issues or opportunities and assist with these.”
What is invoice discounting?
Invoice discounting is different from invoice factoring in one crucial aspect: debt collection remains your responsibility. Invoice discounting typically applies to the total ledger balance, rather than individual invoices. So, this approach can help even out cash flow variances throughout a given period.
This method allows you to retain the management of your sales ledger, so is more appealing to businesses that want to maintain control over this vital component of operations. As such, invoice discounting offers more confidentiality; your customers remain unaware of the financing arrangement with your financier.
Let’s further explore the differences between a confidential and disclosed facility.
Confidential and disclosed invoice finance: a comparison
A confidential invoice finance arrangement is one where your customers are unaware that a financing company is involved. Here are a few things to consider:
There is no obligation to disclose to your customers — the debtors — that your business is using invoice finance, nor does the finance company generally contact them.
Once your confidential facility is approved and established, you’ll inform your debtors of a change in bank details to a new account, which the financier manages on trust.
You submit invoices to both the financier’s platform and your customers. The finance company advances up to 85% of the invoice amounts to you. Following your customers’ payments into the trust account, the finance company will send the remaining balance to you after deducting a service fee.
This method allows you to continue your established accounts payable processes. While you retain the duty of managing payments, you also maintain full control over customer relationships.
Conversely, with disclosed invoice finance, all parties know and consent to the financing arrangement. Here are a few things to consider:
Your invoices will inform your customers about the involvement of the third-party financier, who will also have the authority to pursue outstanding payments.
With a disclosed facility, the finance company reaches out to your customers when an invoice is submitted. These customers will pay into a financier-managed trust account, knowing it is separate from your business’ account.
You might have to pay higher fees for a disclosed facility due to the finance company’s increased involvement in implementing its own debt management strategies.
Like the confidential method, you receive an advance of up to 85% of the total invoice value quickly. The finance company then takes on the role of coordinating with your customers to secure payment. When your customers fulfil the invoice, the finance company transfers the remaining funds to you, less their fees.
This option also delegates the debt collection process to the financier and ensures transparency for everyone involved.
Choosing between confidential and disclosed
So, which is best for your business — confidential or disclosed financing? That depends on a couple of factors. Firstly, the strength of your business’ credit rating. A solid rating may qualify you for confidential options and the corresponding lower fees.
Secondly, your preference for control. Some businesses will want to retain direct management of debtor relations, while others prefer to outsource it.
As businesses become more comfortable with external management of their debt collections and customers become accustomed to third-party involvement, using a financier makes sense as a strategic cash flow decision. Leveraging one of your most significant assets — your receivables — can accelerate your business growth, benefiting you, your suppliers and your customers.
The advantages of invoice finance
Why opt for invoice finance instead of traditional financing methods like a bank loan? Sam weighs in.
“A significant limitation of traditional bank financing is that banks like ’bricks and mortar’ assets, often insisting on property collateral to back business loans,” he says. “The problem is, not all companies have ample property assets for collateral, nor are they inclined to risk the personal assets of their directors.
“Invoice finance, by contrast, uses what is frequently the company’s largest rolling asset — the accounts receivable ledger. This ledger represents the cash customers owe to the business and it typically lies dormant until the payment terms are met. An invoice finance agreement leverages this asset for funding, circumventing the need for property or other personal guarantees.”
Banks are also notoriously slow to respond to funding applications, with some finance approvals stretching beyond six months. This delay means businesses suffer even more cash flow challenges or forfeit opportunities. Invoice finance arrangements, however, can be authorised in a fraction of that time.
Is invoice finance right for you?
When evaluating an invoice finance option for your business, there are a few things worth considering:
The associated costs will vary based on the financier, the specific product, the amount of management required by the financier and whether the arrangement is confidential or disclosed.
“Typically, costs are the interest rate on the borrowed sum and a service fee,” explains Sam. “There might be more work in a disclosed invoice finance facility, as the financier regularly assesses the ledgers.”
Sam adds that in his experience, the fees are only marginally higher than those of a conventional mortgage or overdraft.
The appropriateness of invoice finance will depend on your business requirements. Sam says some businesses have had negative experiences with invoice finance, but this is generally because the financier or product was unsuitable in the specific circumstances.
Apprehensive about relinquishing control of your ledger management to a financier? It’s a legitimate concern, so it’s even more important to partner with the right financier. Seek out an invoice finance company with a robust track record, advises Sam. “Trust in the stability of the financing company is crucial.”
Sam cautions against using finance companies offering rapid solutions. “There are many out there providing short-term loans at steep interest rates. These are quick fixes and aren’t conducive to long-term business viability. Partner with a financier who is committed to supporting your long-term business vision.”
Is your business ready for an invoice finance solution?
Consider these questions:
Due to your payment terms, is your business experiencing cash flow issues?
Are you unable to restock until invoices are paid?
Do you want faster-moving cash flow to ease the pressure?
Are there growth opportunities you want to pursue but can’t until you sort out your cash flow?
Do you contract with large corporations that set longer-than-average payment terms, leaving you with a shortfall?
Are you unable, or don’t want, to provide security like property to access funding?
If you answer yes to any of these, it’s worth considering invoice finance for your business.
“Most businesses that speak to Octet about invoice finance have high supply costs,” says Sam, who gives the example of a Western Australia labour-hire company that experienced depleted cash flow after taking on new customers. Octet provided a $2 million invoice finance facility and the cash flow injection helped the company increase its revenue significantly.
A NSW-based labour-hire company was in a similar position. In just seven years it had grown from a startup to turning over $30 million. Its bank couldn’t support its finance needs and the business had to turn away new work. So it approached Octet for a $9 million invoice finance facility. This allowed it to keep taking on new customers while paying its invoices on time.
Invoice finance allows businesses in agrowth stage to more easily fund their operation without having to wait for debtors to pay.
“These facilities grow with the business,” says Sam. “As you raise more invoices, you can generally access more funding.”
Octet, the invoice finance experts
With Octet’s Invoice Finance facility, you can convert up to 85% of your unpaid invoices to cash within 24 hours. Use this cash to more quickly pay suppliers, buy equipment, invest in more stock or expand your business via staff growth or product and marketing innovation. The solution is fast and flexible — use it as your primary funding source, or only for top-up funds
Octet’s Invoice Finance is available to new businesses, growing companies or well-established enterprises. We like to see an annual turnover of at least $1 million, an outstanding invoice value of $100,000+, and some demonstrated business trading history. But feel free to get in touch if you’re growing fast and turning over $500,000 or more, as we may be able to assist.
When looking for an invoice finance solution for your business, partnering with a reliable financier is essential. Since 2008, we’ve offered a suite of working capital solutions, with Invoice Finance among our specialties. Connect with us today to explore how we can fuel the expansion of your business.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
Whether it’s to improve cash flow, manage a sluggish sales period or realise growth potential, businesses will often need to seek external forms of funding. There are many finance options available, and it can be difficult, as a business owner, to know which way to go.
Debtor finance (also known as invoice finance) is often an attractive option for high-growth businesses. This form of funding enables a business to access funds tied up in its outstanding B2B invoices. And it’s a solution that is growing in popularity, with reports indicating more and more businesses are seeking this form of finance.
Start researching debtor finance and you’ll come across a range of terms, definitions and products, including invoice funding, invoice factoring, invoice discounting, and confidential and disclosed products. So, what is debtor finance, how does it work and how can it benefit your business? In this article, we explore these forms of financing, some of the products available and how they help businesses in a range of industries.
How debtor finance works
As any business owner knows, maintaining cash flow is the most powerful tool for starting, managing and growing your business. Strong, steady cash flow puts you in a better position to:
cultivate good relationships with your suppliers, as you’ll always have the funds to pay them on time
quickly take advantage of opportunities to invest in new products or services and stay ahead of competitors
weather financial storms when business is quiet, or you encounter supply chain issues.
But if your customers are slow to pay, that cash flow can get blocked. That’s where debtor finance products can help, by giving you access to funds tied up in your business’s outstanding invoices.
Sam Ralton, Octet’s Director of Working Capital Solutions, explains. “There are a number of terms used to describe these products. Invoice finance, receivables finance, debtor finance — they all cover essentially the same broad offering, which considers the receivables ledger or the invoices that are outstanding in a business and provide funding against those.”
Invoice factoring and invoice discounting are two ways to finance outstanding receivables to keep money flowing. Let’s explore these options.
What is invoice factoring?
With a debtor finance facility known as invoice factoring, you effectively sell your accounts receivable to a financier. In exchange, they give you an agreed percentage (often up to 85%) of the value of the invoices upfront — quickly and easily.
From there, the financier becomes responsible for collecting and processing payments from your clients. Once they’ve collected payment, they pass the rest of the money onto you, minus a small fee. Here are a few things to keep in mind.
Because you pass the responsibility of collecting payment to the financier, invoice factoring can potentially save you bookkeeping fees and staff time. The trade-off is that you forfeit some control over your day-to-day operations.
Invoice factoring companies generally help with sales ledger management by allocating payments, and sending statements and reminder letters. The associated fees are therefore higher than for some other debtor finance services because the financier does more work.
Your customers will know you’re using a financing facility because they need to deal with your financier.
What is invoice discounting?
Invoice discounting (also known as receivables discounting) is similar to invoice factoring but with one key difference. With invoice discounting, the financier doesn’t take on the responsibility of collecting the debt. Instead, that stays with you. This is what you need to know.
With invoice discounting, you manage your sales ledger, which means you keep control of a significant aspect of your business.
Rather than operating on an invoice-by-invoice basis, invoice discounting is usually based upon your ledger balance as a whole. This lets you smooth out any cash flow fluctuations you may have over the period.
Invoice discounting also lets you keep your funding confidential from your clients. They won’t know that you’re using a financier.
Whichever method you choose, both invoice factoring and invoice discounting let you tap into your accounts receivables to keep your cash flowing and your business growing.
The evolution of factoring and discounting
Sam says the term factoring is used less frequently these days. “In the early days, invoice factoring was fairly intrusive. Businesses found they had to hand in every invoice, and the financier would chase up the debts.”
Today, reputable finance providers like Octet offer more tailored debtor finance solutions and collaborative partnerships. “We have supply chain finance managers that are constantly in discussions with clients, looking for any cash flow issues or opportunities that may arise and assisting with these.”
“We have also seen the emergence of hybrid type disclosed invoice facilities that enable the business and financier to work in partnership. These allow the business to retain their receivables collections, with the financier simply sending monthly statements in support. It’s a lighter version of disclosed invoice finance and reflective of the progression of the product over the years.”
What’s the difference between confidential and disclosed debtor financing?
A confidential debtor facility is where your customers don’t know a third-party financier is involved. You’re under no obligation to tell your debtors (in other words, your customers) that you’re using debtor finance, and the financier does not contact them on your behalf.
It generally attracts lower fees as the financier can’t put their owndebtor management strategies in place, and your clients don’t know they’re involved.
With disclosed invoice discounting, all parties know and agree to the financing facility. Your invoices will need to include communication regarding the third-party financier, who has the right to contact your customers to chase payments.
There are generally higher fees involved as this allows you to hand off debtor collection procedures to the financier and provides full visibility for all parties involved.
How does confidential invoice discounting work?
Once your facility has been approved and set up, you’ll need to communicate a change in bank details to your debtors. The new account is held in trust by the financier.
You then upload invoices into the financier’s system at the same time you send them to your customers. The financier then transfers up to 85% of the invoice value directly to your bank account, often less than 24 hours later. Then, once your customers pay the invoice into the trust bank account, the financier transfers the balance to you, minus their agreed fees.
This process means you can keep your existing accounts payable procedures in place. Chasing up late payers remains your responsibility, but that also means you maintain control of that vital relationship.
How does disclosed invoice discounting work?
Once you’ve been approved for a disclosed facility, the financier will get in touch with each of your customers as you upload their invoices into the system. Your customers will need to pay the invoices into a bank account held in trust by the financier, as they would with a confidential facility. However, they will know that it isn’t your business’ bank account.
Just as with confidential invoice discounting, you’ll receive up to 85% of the invoice value within as little as 24 hours of uploading the invoice into the system. Then the financier will liaise with your customers to collect payment. Once the customers have paid, the balance of the invoice value will be transferred to your bank account, minus fees.
Which is best: confidential or disclosed?
The best choice for your business generally depends on two factors:
Your business’ current credit rating. If your business has a strong credit rating, you may be eligible for confidential invoice discounting.
How much control you want to have. Some businesses prefer to keep debtor management as part of their client relationships, while others are happy to hand it off to a third party.
Businesses are becoming more comfortable handing over control of their debtor management and customers are becoming increasingly used to a third party being involved. Engaging a financier to access your receivables means you’re being smart about your cash flow. Accessing one of your biggest business assets enables you to grow faster, which is better for you, your suppliers and your debtors.
The advantages of debtor finance
Why would a business choose debtor finance over traditional forms of finance, such as a bank loan? Sam explains.
“Banks focus on ‘bricks and mortar’ assets and are very keen on taking property security and effectively offering a mortgage when it comes to business lending,” he says, adding that this is one of the major disadvantages of traditional bank finance. “That’s because not all businesses have sufficient property assets to use as collateral, nor do they generally want to use their director’s personal assets as security.
“Debtor finance is effectively funding against the biggest asset in most businesses — the receivables ledger, which is cash owed to a business by its debtors or customers. That ledger typically sits there as an asset, not doing anything until paid pursuant to agreed payment terms. Because a debtor finance facility actually uses that asset as security for funding, it removes the need for directors or owners having to put up property or other security.”
Sam says banks can also be slow-moving, taking more than six months to approve applications for finance applications. In the meantime, businesses can miss out on opportunities or fall deeper into cash flow woes. Debtor finance applications, on the other hand, can be approved within a matter of weeks.
Is debtor finance right for you?
When considering a debtor financing product or facility for your business, there are a few things to keep in mind. Like any form of finance, there are costs involved. These will vary depending on the provider, the type of product, the financier’s workload and whether it’s a confidential or disclosed facility.
“Generally, there’s an interest component on the borrowed amounts and a service fee,” says Sam. “There’s a bit more work involved in disclosed debtor finance because the financier is constantly reviewing the ledgers.
“But businesses using a debtor finance facility are probably only paying slightly more than they would for a standard mortgage or an overdraft facility.”
The suitability of this type of facility depends on your business and its needs. Sam understands some businesses have had negative experiences with debtor finance, but that’s often the result of choosing the wrong financier or using a product not suited to the business.
Business owners might also be concerned about handing over control of their accounts receivable or ledger management to a third-party financier. This is why choosing the right finance partner is vital.
Look for an invoice financier with a solid reputation, says Sam. “You need to have comfort in the security of the business that’s providing funding and partner with someone that’s going to last.”
Some finance companies offer quick fixes, which Sam advises businesses to avoid.
“There are a lot of companies that do short-term loans at higher interest rates, fairly quickly, but it’s not going to help a business become sustainable in the long term. We’ve seen business owners take up short-term loans and then realise how expensive they are. My advice is to look for a financier that is going to be a long-term partner and understands the overall business strategy and success measures.”
Is your business ready for a debtor finance solution?
There are several reasons why you might be considering debtor finance for your business. Due to your payment terms, you might be experiencing cash flow issues, find that you can’t restock until invoices are paid, or simply want faster-moving cash flow to open up growth opportunities.
“Most businesses that speak to Octet about debtor finance have high supply costs,” says Sam. “Let’s take the example of alabour-hire company, which will raise an invoice after the work has occurred. But they must pay staff before their invoices are paid.”
Debtor finance allows these businesses to fund their workforces without having to wait for debtors to pay. This is particularly helpful in the growth stage of a business.
“These facilities grow with the business because as you raise more invoices, you can generally access more funding,” Sam says. “And as a business winds down, the facility pays itself out so the directors aren’t left with a large hole that takes away their property.”
A fast-growing business was exactly the opportunity facing a NSW-based labour-hire company that recently sought Octet’s help. The business grew from a humble startup to turning over $30 million in just seven years, and it had outgrown its bank, which just couldn’t keep up with its need for flexible and fast funding. The business didn’t want to turn away new customers but it just didn’t have the cash flow to take on new business and pay its debtors on time. Octet’s debtor finance solution filled that gap.
A Western Australian-based network and telecommunications parts wholesaler was also outgrowing its existing funding arrangement when it turned to Octet. The business was growing fast, but its available capital couldn’t support that growth. Octet provided a notified (disclosed) invoice discounting line with a $600,000 funding limit. This gave the business a line of credit where it could access up to 85% of the value of its invoices as cash within 24 hours of customer sales.
Octet, the experts in debtor finance
Octet’sDebtor Finance facility lets you convert up to 85% of your unpaid invoices to cash within 24 hours.
But is it the right funding choice for you? It might be a good fit if your business:
offers longer payment terms to customers
is seasonal
contracts to large corporations that can set their own (longer-than-average) payment terms.
Debtor finance gives you the cash flow to pay suppliers, buy equipment or expand your business. Because it’s based on your outstanding ledger balance, the amount of finance you have available generally grows as your business does.
Unlike many other types of finance, you don’t need to provide security like property. So, if you’re a business owner who doesn’t have personal property, or your assets don’t have enough available equity, debtor finance may be your best option. It’s flexible enough that you can use it as your primary source of funding, or only for top-up funds.
Octet’s Debtor Finance is available to businesses ranging from newer companies to well-established ones. Ideally, we would like to see an annual turnover of at least $1 million, an outstanding invoice value of $100K+, with some demonstrated business trading history (but don’t hesitate to contact us anyway if you’re fast-growing and turning over $500,000 or more, as we may be able to help).
Discover more about debtor finance
Considering a debtor finance solution for your business? You’ll want to team up with a financier you can trust. Theright solution for you will depend on factors like how big your business is, your assets and the funding amount you need to inject.
Octet has been providing working capital solutions, including debtor finance, since 2008. Talk to us today to discover how we can power your business growth.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
In the dynamic world of fast-moving consumer goods (FMCG) and logistics, growth and efficiency are the lifeblood of success. This is especially true for a rapidly expanding Australian promotional logistics company, which found itself in need of an invoice financing solution to fuel its ambitious plans. Also known as ‘accounts receivable financing’, ‘invoice factoring’ or ‘debtor finance’, the solution allows for accelerated business cash flow and rapid growth.
Via a strategic partnership with Octet and a tailor-made debtor finance facility, the company overcame its financial challenges and soared to new heights.
Navigating growth in the FMCG arena
This Australian FMCG business has enjoyed great success. However, its fast rise hasn’t come without some unique challenges. Time and resources are crucial for FMCGs, and as orders surged and new opportunities emerged, the company was confronted with the need for substantial and reliable working capital. Traditional finance avenues proved slow and inadequate, threatening to stunt the company’s clear growth potential.
Facing this challenge head-on, the business sought a finance partner who understood the intricacies of their industry and could provide swift and flexible solutions. Enter Octet.
A tailored approach to funding growth
Octet’s experienced team delved into the company’s unique situation, recognising that more than a ‘one-size-fits-all’ solution would be needed. Drawing on their deep understanding of FMCG finance requirements, Octet proposed an Australian debtor finance facility. This solution would unlock the working capital in the business’ outstanding invoices, providing an immediate stream of funds to sustain growth momentum.
Dan Verdon, Octet’s NSW Director of Working Capital Solutions, explains. “The business’ main customer is a multinational food and beverage conglomerate, which sometimes represents up to 50 per cent of their entire receivables ledger.
“The company joined Octet in February 2023. We’ve since been able to provide the business with a debtor finance facility that has given them the funding they required without restricting any concentration percentage, which was key for them. Their previous financier couldn’t get comfortable with funding 50 per cent to one customer – so in that area, we’ve really made a material difference.”
Ambitious growth projections established
Thanks to the cash flow boost and funding provided by Octet, the company’s growth trajectory can continue unhindered and its operations have accelerated due to the newfound financial flexibility.
“Initially, the facility limit was $3.2 million, and that’s already been increased to $4 million,” Dan says. “When they first became a client, annual revenue was $16 million. The business is now turning over $19 million, so that’s a pretty significant increase.”
Personalised service makes all the difference
Octet understands the importance of offering a personalised supply chain finance service. While traditional lenders often have client managers overseeing portfolios upwards of 60 clients, Octet supply chain finance specialists oversee significantly fewer, leaving more time to focus on each client’s unique cash flow requirements.
For our business clients, timing and agility are both crucial. Octet is able to swiftly tailor working capital and supplier payment solutions that meet their unique supply chain requirements.
“The key thing to understand is growth, and the dynamics of business growth,” Dan says. “Most of our clients using receivables finance are going through a growth phase of some variety. They don’t have the working capital or cash flow efficiency to take it to the next growth stage – that’s where we come in.”
Unleash your business potential with Octet
Octet’s know-how and customised supply chain finance solutions unlock remarkable growth for our clients across a range of industries. So what’s next for your business? Discover the benefits of debtor finance, trade finance and our other intelligent supply chain finance solutions today.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
Cash flow is a critical factor for any business. The time it takes for invoices to be paid is commonly referred to as debtor days, and this is a significant factor when determining the inflow of customer payments.
Managing this period so payments are punctual and consistent can be challenging. However, to accurately assess your business’s finances, you must understand how to calculate debtor days.
In this useful guide, we’ll explore the simple formula for calculating average customer payment time. Plus, we’ll look at strategies to accelerate and optimise cash flow. Leveraging market-leading supply chain technology and finance solutions can help your business on the path to consistent cash flow, and ultimately, sustainable growth.
Understanding debtor days
Nigel Thayer, Octet’s WA Director of Working Capital Solutions, explains how important it is for businesses to understand debtor days. “As an indicator and measure of cash flow, knowing your debtor days can help with cash flow planning, customer management and other internal issues.”
To calculate debtor days, businesses can average them based on monthly, quarterly, or annual data with a receivable days formula. This formula divides the average receivables ledger balance by average daily sales.
Here’s an example of how to calculate debtor days on a monthly average:
Debtor Days = (Total Accounts Receivable / Average Daily Sales)
Total Accounts Receivable = (Accounts Receivable at the beginning of the month + Accounts Receivable at the end of the month) / 2
Average Daily Sales = Total Annual Sales / 365 days
For example, John Smith & Co had $500,000 in accounts receivables for the last month. They also have annual sales of $4,000,000 (or $10,958.90 a day). Therefore their average debtor days is 45, and to maintain healthy cash flow, the business needs to collect its outstanding debts in at least 45 days on average.
This formula helps you determine the average debtor days, that is the average number of days it takes for your customers to pay their invoices.
Why do businesses monitor debtor days?
Monitoring debtor days is part of the overall management of your business’s finances, and understanding them allows you to follow trends and better plan operationally.
“The higher the debtor days, the greater the gap between incoming business revenue versus business outgoings (or costs),” Nigel explains. Common fixed and variable outgoings, including wages, fuel, rent, stock, and loan repayments, must be paid promptly for a business to sustain itself, so adequate and flexible cash flow is needed.
“Without sufficient working capital or access to funding, a business with higher debtor days could find it difficult to meet the business outgoings,” Nigel says. Serious financial issues can arise without active monitoring in this area, including bad debts and limited cash flow.
What affects debtor days?
Understanding your business’s debtor days can help to manage cash flow and indicate key trends. Take particular note of these factors which can impact the time it takes for customers to pay invoices, causing debtor days to be higher than usual:
consistent customer disputes about work performance or delivery
increases or decreases in revenue for the period
inaccuracies in invoicing and delays in payment processing
an anomaly in the receivables (one customer skewing the figures)
absence of good receivables management or collection practices in-house
the number of credit notes or refunds issued in that period
generally slower-paying customers
issues with technology and automation
key staff turnover
How to accelerate payments and reduce debtor days
Reducing debtor days is easier once you’ve identified the factors impacting them. After determining the cause of an increase, these strategies can be useful in accelerating payments:
Collection procedures
“Establishing regular practices around follow-ups and reminders on overdue accounts (usually automated within your accounting software) can accelerate payments from your top list of customers,” Nigel says. Other strategies include credit guidelines, stop-credit procedures and allocating sufficient time and attention to collecting overdue accounts.
Strengthening customer relationships
Improving customer relationships can simplify the process of negotiating payments and managing debtor days. Ways to encourage better payment terms include open communication and accessible customer support, offering multiple payment options (including credit cards) and asking for customer feedback.
Automation solutions
It’s easy to lose track of receivables management amongst all the other considerations and priorities within a business. Taking advantage of technology and automation means reducing the effort — and improving the consistency — of your business’s finances. “Technology doesn’t replace the need for having an active relationship with your customers, but it does help you manage the customer cohort better from a payment collection perspective,” Nigel explains.
Debtor management solutions — like Octet’s debtor finance product and platform — can help. Our supply chain management platform, digital wallet and global network make automating and streamlining your finances easier.
“Gaining a reduction of even two or three debtor days can have a significantly positive effect on cash flow,” Nigel says. “Businesses should be adopting all, or as many of, these strategies as possible.”
Take control of your cash flow with Octet.
Managing debtor days is made easier with Octet. Speak to our team of working capital specialists about innovative debtor finance solutions and discover how leveraging intelligent technology can optimise and accelerate your cash flow.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.