Why Bad Debtors & Ageing Invoices Hurt You More Than You Know. How to stop it now!
Bad debtors and Debtor Finance get on like oil and water.
Ageing Invoices can hurt your cash flow even with Debtor Finance.
Why is this topic so important?
We have seen a number of clients over the years bring us in to solve a cash flow problem, only for the problem to return at a later date when the invoices age.
Here is how it plays out:
You are travelling along nicely as a client.
You have put a lovely Debtor Finance facility in place, and your cash flow problem is solved…or so you might think.
You go off and focus on other what seem like more pressing issues. Then one day out of the blue, you find that you are not getting any more money from your funder due to a bad customer.
Let’s now talk a little about the impact of a bad debtor on your company.
There are 5 things to consider here:
- Debtor Finance only goes out to 90 days, if the invoice is not paid, then it goes into recourse. Once the invoice is in recourse, the financier will look to create a reserve account in order to charge back the debt. Now they have to get that money from some place. Where do they usually get it from? The real answer is, any place they can. This means they will offset other advances and rebates to cover off this “bad invoice”. They will also bank any money that comes into the blocked account which is not financed to cover the debt. This will lead a rather sizeable cash flow hole depending on where and over what period the financier obtains the money.
- If you have other shorter dated invoices on foot with the funder: they will look at the cross ageing of the invoices with that particular customer and then say that customer’s invoices are now “tainted”, this means they will want you to buy back all invoices to that customer even if they are not over the 90 day term. Think about that flow on effect!
- The cost to your business of having the debts charged back.
- Changes in advance rates due to dilution and concentration issues.
- Impact on your relationship with your financier. If you are selling invoices to your financier knowing that the customer is not going to pay or is difficult, they won’t like it. They may even ask you to refinance at a considerable cost to your business.
It’s important to enter into a facility for the right reasons, you can have bad payers, but you must have things in place that will arrest the situation or change something from day one. Don’t think you can solve the problem by throwing money at it. It takes real changes in behaviour to solve the problem of a bad payer.
So let’s summarise here;
- It’s true the Debtor Finance does assist with cash flow, it brings forward your cash flow, but it delays and magnifies the issue of the bad payer.
- One thing it doesn’t completely cure is the behaviour of bad debtors/customers (it is only part of the solution).
- One point to also consider is Debtor Finance does assist with soft collections, but the emphasis here is on “soft” , we are at our heart financiers, not debt collectors, if your client has a bad accounts department, or they are not in a position to pay, then its best to not use finance in that situation.
What happens if I get a bad payer and I am using Debtor Finance?
If you find yourself in a situation where a payer becomes bad, communicate with your financier and let them know what is happening. Its best you let the financier know early and not find out during an audit.
Communication is key, financiers want to do the right thing by you but they can only do this when there is openness and transparency. And please don’t finance debtors if there is any doubt at all that they will pay.
For an appointment with a Product Specialist call the office on 1300 652 158.
Read the video transcript below.
Daniel: Hi, I’m Daniel from AR Cash Flow. I’m here again with Julia.
Welcome to Funky Friday.
Julia: It is pretty funky, isn’t it?
Daniel: It is. We missed Whiteboard Wednesday this week. So we’ve
changed the name. Okay, the topic today is quite an in-depth
topic, and it’s very important and critical, and Julia, you made
a great point about it earlier.
Julia: Today we’re going to be talking about aging invoices and bad
debtors. The two go together like oil and water, and today I
really wanted to talk about the implications of an aging invoice
and a bad debtor to your business and essentially to your cash
flow. So, Daniel, we’ve got a few points here. Why don’t we get
started with the first one.
Julia: That’s 90 days. Go.
Daniel: Okay. So when you’ve got a business, you’ve got a cash flow
problem, most small businesses owners they put that debtor
finance facility in place, and then they get distracted. Now
they get distracted and they focus on other things. If they’ve
got bad debtors or bad payers, they find all of a sudden, down
the line they’ve got a massive problem again, and the problem is
even bigger than when they started.
Julia: I think they all almost ignore the fact that they’re a bad
debtor and just want to get the quick cash flow injection into
their business by submitting an aging invoice.
Daniel: Some clients, that is definitely the case. So debtor finance,
as we all know, it really only goes out to 90 days. Now when an
invoice hits 90 days, what a funder will do is they will want to
put that invoice into recourse. Now when they put it into
recourse, what that means is that they want you to buy back that
The problem here, as you can imagine, begins with, Where does
the financier get that money from? The simple answer is and the
truth of the matter is they get that money from anywhere that
they can. There are four key area where they can get that money
from in your business that I can think of.
The first one is that they can stop giving you advances. So when
they fund a new invoice, instead of giving you the money, they
can take that money and use it to pay back that old invoice.
The second component or the second part where they can get their
money from is from any un-financed money that comes into the
account. So you may have most of your invoices or customers
paying into the blocked account with your funder. If you haven’t
financed that invoice, they’ll collect that money and offset it
against that bad invoice.
The third way they do that is out of your rebate. So when you
finance an invoice, generally you get 80%, sometimes 90% against
your invoice. That last 10% or 20% that comes in when your
customer pays that invoice, they’ll just keep that and apply it
The fourth part is they may, and this could be the worst part,
they may come back to you and ask you for the money. Your answer
will probably be, well . . .
Julia: I don’t have it.
Daniel: That’s why I’m using debtor finance. That’s a great point. So
that’s the start of the implications when you have a bad debtor
or a bad payer.
Julia: Okay. Let’s move on.
Daniel: Okay. Cross aging and taint. So, not only are they going to ask
you to buy back that particular debt that’s over 90 days, but
the debtor finance company will look at what’s called a cross
aging. That is they’ll look at that particular customer, all the
invoices that you have due and payable or that are outstanding
to that customer. The ones that are 10 days old all the way
through 90 days plus.
What we call that in the industry is “taint.” They’ll say that
customer is now tainted because of that old invoice. So
depending on how much you deal with that customer and your terms
with them, you’re going to have a serious cash flow hole or
Julia: That means you won’t fund any of them.
Daniel: Any invoices of that particular debtor, and we’ll ask you to
buy them all back. The third point, recourse fees. Finance
companies hate invoices that go over 90 days, and the reason is
because it’s an administrative nightmare for us. We’ve then got
to deal with you, deal with the customer, try and get that
invoice paid somehow.
Not only that, everybody has a master. Most finance companies, they
use a wholesale funding line to fund their business, and they’ve
got to explain why their ledger, which is a mirror ledger of
yours, has invoices over 90 days. They hate that. As a result,
they will charge you nice fees for recoursing those invoices
back to you. So there’s a massive cost there as well.
The fourth point, we’re up to the advance rate. If that customer
that’s bad is a big cross section of your ledger, it may
generate concentration issues on your ledger, because as a
result of them dropping off, you’ve now got less debtors, so
therefore your advance rate may be cut back as a result. Not
only will your advance rate be cut back because of that bad
payer or due to the concentration, dilution comes into effect.
The finance company may look at the impact of that bad debtor
generally across your ledger, your sales ledger and look at it
as a credit note, and they may then apply a dilution, meaning
that no longer will your invoices be valued at 100 cents on the
dollar. They may cut it back to 90 cents, and then give you 80%
of 90 cents.
Julia: It’s almost like a domino effect.
Daniel: There is a massive domino effect, and I think everyone . . .
Julia: That’s what you’re trying to say.
Daniel: Yes, I think people are starting to get the picture. The last
point here is point five, and that is your relationship with
your finance company. Finance companies hate, as much as you,
old, slow paying debtors. If they find out you’re selling them
invoices that you know are going to go into recourse or you know
are never going to get paid, and they know that you know that,
they are probably going to ask you to pay back those invoices
really quickly, and they’re going to be quite aggressive about
it. More intensely important than that is they may even show you
the door, ask you to refinance, and they may do that, not in a
nice way, but, in a very abrupt manner. You don’t really want
that to happen because it costs your company a lot of money to
refinance, in time, in resources, and did I say money, yes,
So there are the five points I really want to make that I think stick
out, and I hope that they really draw a great picture of the
Julia: Okay. Daniel, I’m just going to summarise what you just been
talking about. Basically, I can summarise it in three points. So
the first thing is you can’t change you bad debtors’ behaviour,
but, you can change your own. So what you really need to think
about is: Is this debtor a good investment to my company, or
should I just get rid of them?
Number two is debtor finance is only part of the solution. Yes,
you can submit an invoice and get money for it. But if you don’t
think about who your bad debtor is, it’s just going to cost you
more money down the end of the lane.
Dave: Yes, that’s right. You’re going to have to pay that money back to us
plus the fees and cost.
Julia: That’s right. While it might be a quick fix solution to start
with, it might not be a solution for the long run.
Number three, we are not debt collectors. So if you do have a bad
debtor and you know they’re slow paying on their debts, hire a
debt collector. Debtor finance, we only do soft collections.
Dave: Correct. We’ll certainly assist in your accounts receivable
department. But the reality it’s not hardcore debt collection,
which bad payers need.
Julia: Exactly. And Daniel, we just had one more point as well. What
happens if I have submitted an invoice and I have a bad debtor,
what do I do?
Daniel: As soon as you know or you think that that debtor could be a
problem, the best thing to do is communicate directly with your
finance company. Let them know the situation, because there’s
usually not any problem that we can’t work around. If we know
about it straight away, then we can sort of assist you in making
sure that the impact of that debtor on your business is
Julia: We will try to help you.
Daniel: That’s exactly right.
Julia: So don’t sweep things under the rug.
Julia: And communicate.
Daniel: Well, it will all come out in the wash anyway.
Julia: That’s right, and cost you more money.
Daniel: Yep. Oil and water.
Julia: Okay. Guys, if you’d like an appointment with Daniel, call the
office on the 1300 number, and thank you for watching.
Daniel: Thank you.