Debt financing can restore client cash flow

Unpaid invoices create cash flow pressure. You can help clients chase debtors or help them outsource it.

Invoice with bank notes behind

Delayed payments hurt more than just the business

Getting paid on time is essential for the wellbeing of a business – and the wellbeing of the owner. More than half of business owners worry about cash flow every month and just about all of them have unpaid invoices that could relieve the pressure.

Unpaid bills are unrealised cash flow. And in the case of 90-day-old invoices, there’s a risk they’ll become lost income.

Tell them the good news

Start by explaining to your clients that unpaid invoices are real assets. Some small businesses become resigned about them and give up on them. Tell them they have options.

Like any asset, however, unpaid invoices deteriorate in value as time goes on. To get maximum return on them, business owners need to act quickly. Walk through their options and develop a battle plan.

Go after the low-hanging fruit

First off, you might offer to help chase debtors yourself. Many small business owners simply don’t have the time or resources to follow up on unpaid invoices, and many feel uncomfortable about doing it. You could immediately solve one of their big pain points by filling that role for them. Get copies of their unpaid invoices and make some calls.

In the longer term, you could set up accounting software to chase unpaid invoices automatically. Some systems will email pre-written reminders to debtors as their accounts become due, and then overdue. Those simple communications are all that’s required for many late payers.

When debtors don’t respond to the reminders, the system can alert you to call them. You could consider making that call for your client. It’s a simple service and one that they’ll truly value.

Escalating old debts

When debtors don’t respond to reminders or phone calls, small business owners start to feel lost. They may write the invoice off as a bad debt and struggle on with diminished cash flow. Tell them that’s not necessary.

Your client can outsource their trade debts to third-party companies and salvage some value from their unpaid invoices through:

  • factoring
  • invoice discounting
  • using a debt collection agency

1. Factoring

Your small business client can sell their unpaid invoices to a factoring company. They’ll get paid between 75 and 90 percent of the value of the invoice within one to two business days, and they may end up getting more.

The factoring company will become the owner of the invoice and they’ll pursue the debt themselves. If they succeed in getting the invoice paid, they’ll reimburse your client, withholding an agreed percentage to cover their fees.

The upfront payment and fees will depend on the debtor’s credit history and the industry involved.

Advantages of factoring:

  • Your client gets quick access to cash flow
  • They guarantee some revenue for the goods or services sold

Disadvantages of factoring:

  • Your client won’t get the full value of the invoice
  • The factoring company may interact with the debtor, which could harm your client’s relationship with that customer

2. Invoice discounting

Some finance companies will loan your client money, using the invoice as collateral. When the invoice is finally settled, your client uses the money to repay the loan. These companies will loan about 80 percent of the value of the debt for invoices under 90 days old – and the amount goes down from there.

Importantly, your client retains ownership of the invoice. This means they’re ultimately responsible for collecting the debt, but they can also do it in a way that preserves the business relationship.

Your client will be charged interest on the loan and, in many cases, a fixed monthly fee as well. This service may only cost your client a few percent of the value of the debt, but that can change dramatically depending on the market they’re in and whether or not the invoice is eventually paid.

Advantages of invoice discounting:

  • Your client gets quick access to cash flow
  • They stay in control of the customer relationship

Disadvantages of invoice discounting:

  • Your client won’t get the full value of the invoice
  • They still have work to do to chase the debt
  • This service is usually only available for large commercial invoices (not consumer or retail businesses)

3. Debt collectors

Debt collectors can play a role in your client’s AR strategy. They know debt collection laws and best practices, and they have the resources to find debtors that have relocated.

Debt collectors generally charge a high rate because they typically chase very late, high-risk debtors. And because they deal directly with the debtor, your client will lose control of their customer relationship. For these reasons, debt collector agencies should probably be a last resort.

Buyer beware

These are all financial products provided by third parties. The quality of service will differ between them. Be sure to do your due diligence.

When to consider debt financing

Obviously your client needs to be chasing reasonably big invoices to justify these services. Otherwise there won’t be enough margin to pay the factoring company (or collection agency).

The debtor’s credit rating is also important. Factoring companies will not get involved if the risk of non-payment is too great. This is another reason for your clients to get credit reports on their customers – especially if they’re doing big projects that involve a lot of money.

It’s relatively easy to get credit reports online nowadays.

Finding the right debt financing financing company

If any of your clients could use debt financing, it might be worth finding local providers. Before choosing companies to work with:

  • Make sure their rates and fees are clear: If a debt factoring company makes it hard to interpret their rate and fee structures, be cautious about working with them. Some companies attract new customers with very low factoring rates, but will sting your clients with additional fees.
  • Make sure you know what your clients will receive upfront: Find out what percentage of debt the company will pay your clients in advance. This will change depending on the creditworthiness of the debtor, but the debt factoring or invoice discounting company should be able to give you some idea of what to expect. It will need to be a good percentage if it’s to genuinely help your clients’ cash flow.

Debt financing can repair cash flow

As sales increase, a business generally has more working capital to meet costs and grow the business. When debtors fail to pay, that cash flow breaks down and businesses come under pressure.

They miss out on opportunities and may eventually struggle to pay their own creditors. It can also make your clients anxious about their business viability. Help de-stress the situation by creating a formal plan for dealing with late payers. There are options for early intervention, and for escalating bad cases as time goes on:

  • Use accounting software to automatically send invoice reminders
  • Send statements for overdue accounts, requesting payment
  • Speak to the debtor on the phone
  • Consider debt factoring or invoice discounting
  • Consider debt collection


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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