What is Debtor Finance?

Debtor finance, also known as accounts receivable finance, is a financial service that allows businesses to access funds tied up in unpaid invoices. For a UK audience, understanding debtor finance is crucial for improving cash flow, managing working capital, and sustaining business growth.


Key Aspects of Debtor Finance:

  1. Definition:
    • Debtor finance is a type of financing where a business uses its accounts receivable (invoices) as collateral to obtain immediate funds. This helps improve cash flow and provides working capital to manage day-to-day operations or invest in growth opportunities.
  2. Types of Debtor Finance:
    • Invoice Factoring: The business sells its invoices to a factoring company at a discount. The factoring company advances a percentage of the invoice value (typically 70-90%) and takes on the responsibility of collecting the payment from the customer. Once the customer pays the invoice, the factoring company pays the remaining balance, minus a fee.
    • Invoice Discounting: The business retains control of its sales ledger and customer relationships. The invoice discounting provider advances a percentage of the invoice value. When the customer pays the invoice, the business repays the advance plus any fees. The process is confidential, and customers are unaware of the financing arrangement.
    • Selective Invoice Finance: The business chooses specific invoices to finance, allowing for greater flexibility. This can be structured as either factoring or discounting.
  3. How It Works:
    • Invoice Submission: The business submits its invoices to the finance provider.
    • Advance Payment: The provider advances a percentage of the invoice value to the business.
    • Collection: For factoring, the provider collects payment from the customer. For discounting, the business collects the payment and repays the provider.
    • Final Payment: Once the invoice is paid, the provider releases the remaining funds to the business, minus any fees.
  4. Benefits:
    • Improved Cash Flow: Provides immediate access to funds tied up in unpaid invoices, helping businesses manage cash flow more effectively.
    • Working Capital Management: Frees up working capital that can be used for operational expenses, payroll, or investment in growth.
    • Growth Facilitation: Enables businesses to take on new projects or clients without worrying about cash flow constraints.
    • Credit Control: Factoring companies often provide credit control and collection services, reducing administrative burdens on the business.
  5. Costs and Considerations:
    • Fees and Charges: Debtor finance involves fees, which can include service fees, discount rates, and administrative charges. It’s essential to understand the cost structure and ensure it’s financially viable.
    • Customer Relationships: In invoice factoring, the involvement of a third party in collections can impact customer relationships. Invoice discounting maintains confidentiality, preserving direct customer contact.
    • Eligibility: Not all businesses may qualify for debtor finance. Providers typically assess the creditworthiness of the business and its customers, as well as the quality of the invoices.
  6. Example:A UK-based manufacturing company has £200,000 in outstanding invoices with payment terms of 60 days. To improve cash flow, the company uses invoice factoring.
    • Invoice Factoring: The company sells its invoices to a factoring provider.
    • Advance Payment: The provider advances 85% of the invoice value (£170,000) to the company.
    • Collection: The factoring provider collects payment from the customers.
    • Final Payment: Once the invoices are paid, the provider releases the remaining funds (£30,000) to the company, minus a factoring fee.


Debtor finance is a valuable financial tool for UK businesses looking to improve cash flow and manage working capital effectively. By leveraging unpaid invoices, businesses can access immediate funds, support operational needs, and facilitate growth. Understanding the different types of debtor finance, their benefits, and associated costs helps businesses make informed decisions and optimize their financial management.