What debtor financiers look for

It is really important to know the type of service you are looking for from the debtor lender before you meet with them. 

For example, do you need them to perform the administrative side of collecting the debts or are you simply looking to get the money in advance? Will you be discounting a single, large invoice or many invoices? Is this a once-off need (as in the case of a single invoice) or are you looking to use the service on an ongoing basis? How important is it to you if your customers know about you using a debtor financier? All of these factors impact on the final cost of the debtor finance.  

Remember that debtor finance will only work for your business if you generate a reasonable monthly turnover (usually about R200,000 per month).

Like all companies that are in the business of loaning money, debtor financiers want to minimise their risks to ensure that they get their money back. Since they lend money against an invoice or a number of invoices, your customer profiles are extremely important to them.  

Ideally, debtor financiers would like your customers to be large, highly reputable companies that have an excellent credit record. The reality is often far from this. Most small companies have a mix of clients, so expect to be required to provide assurances to the debtor financier that your clients have a good credit record and excellent payment history. 

Debtor financiers are not interested in invoices to individuals or micro businesses. They only want to work with companies that are sustainable and have a good credit history. They will investigate your clients to identify whether their businesses are a high or low risk.

Most debtor financiers only work with companies that have a debtors' book of a certain size. The reason for this is that setting up a factoring arrangement costs a lot of time, energy and legal fees. Just the due diligence on your clients can be a lengthy and costly exercise. A financier needs to make sure that these costs are spent on companies that they can do business with for a long time. 

Since the method of calculating the required debtors' book size varies from lender to lender, you’ll have to add this to the list of questions to ask when you meet with them.

Smaller debtor financiers may be more flexible about the size of your debtors' book, so shop around. Lenders that are prepared to consider single invoice discounting are often more open to working with small businesses.

Debtor financiers will be particularly interested in the state of your debtors' book. Generally speaking, they will not be interested in financing invoices that have been outstanding for a long time as these are considered to be high-risk cases where you may not recover the money. They are interested in current debts owed to your company by clients that are in good standing. 

Bear in mind that, in general, debtor financiers are interested in funding invoices for work that has been delivered in full. This means you will battle to raise debtor finance for invoices that are part payments for large jobs you are still in the process of delivering.

Like any lender, factors and invoice discounters want to deal with viable, profitable and healthy businesses. People are often surprised that the debtor financier is concerned about the health of their company rather than the health of their clients’ companies. Invoice finance does, to a certain extent take the lender's focus off the company that is borrowing the money, and shifts it to their customers. 

There is no denying that the quality of the customers is paramount to the success of an application for debtor finance. However, the debtor financier also wants assurance that they will be working with a company that is healthy and with whom they can build a long term relationship. 

Another key reason why the health of your company is critical to the debtor financier is that, should your clients not pay, the debtor financier will turn to you for the money (remember that they would already have paid you for the invoices, so your company is their backup that they will get their money even if the client defaults).

Some debtor financiers expect you to sign personal surety or to provide collateral against the money they lend you. This is important as they need to know how they can recover the money they lend you should customers default on payments. Once again, you will need to do some research and explore the terms and conditions of the various debtor financiers. Ideally, you want to avoid signing personal surety. Read the Module Understanding Personal Surety before you sign any documents.

Debtor financiers will only work with companies that have registered with the Companies and Intellectual Property Commission (CIPC). This means that if you are a Sole Proprietor seeking to find a debtor financier, you are unlikely to be successful.

The NCA does not concern itself with companies that have assets of more than R1 million. But for those who fall under this threshold, the NCA applies. This means that the lender needs to do a strict affordability test to see if the business can afford the finance.

In general, debtor financiers will expect you to provide the following documents. Remember that unless the debtor financier makes copies of your documents directly from an original, you will need to have copies of legal documents such as IDs and Certificates of Incorporation certified by a Commissioner of Oaths. This can be done at no cost at any of the larger police stations.

• Documents of incorporation (company registration documents).
• Audited financial statements for the past two years or financial statements signed off by your accountant if your business does not need to conduct financial audits.
• A cash flow forecast.
• The latest management accounts.
• An age analysis of debtors.
• An age analysis of creditors.
• Details and IDs of the owners or directors of the business.
• An assets and liabilities schedule of the owners or directors. This must include any personal sureties that have been signed.
• Details of the business’ auditors, accountant, lawyer and landlord.

Some of the debtor financiers also require you to provide a company profile, marketing material and business stationery.

Once you have gathered the information needed by the debtor financiers you are ready to meet them and compare their offerings. Ideally, you want each financier to provide you with the following information so that you can select the best option for your specific needs:

• Administration fees.
• Interest rates.
• Retention amounts.
• Penalties for overdue invoices.
• Invoice management fees.
• Minimum monthly fees (if any).
• Arrangements for payment should clients default.