Spot Factoring Vs Whole of Turnover Debtor Finance Vs Partial Ledger Debtor Finance. What Costs more?

 In Debtor Finance, Invoice Factoring, Invoice Finance

It’s that time again! Welcome back to whiteboard wednesdays!

Today we discuss the differences between Spot factoring, whole of turnover Debtor Finance and partial Debtor Finance  from a borrower/client point of view.

How does the cost vary per invoice with each type of facility?

Watch the video and/or read the transcript below.

If you would you like an appointment with a Product Specialist, call the office on 1300 652 158.


Daniel and Julia discuss the potential Debtor Finance solutions and the advantages and disadvantages associated with each option.

Spot Factoring – Spot factoring is where you just want to have the flexibility to finance one invoice at a time. Spot factoring costs can be very high up to 12-14% of the invoice this is however dependent on the financier and the length of time. Whole of

Turnover – Whole of turnover means that you’re going to finance pretty much everything on your ledger, and you’re going to at least assign everything in your ledger to the financier.

Partial – Partial is when you assign your whole ledger to the financier as security, but you only legally assign specific debtors in that ledger.

Julia: Hi everyone. Welcome back to Whiteboard Wednesdays. This is
Daniel, and I’m Julia. Today we have an awesome topic. Daniel, why don’t
you talk everyone through it.

Daniel: Today I’m going to compare three different types of debtor
finance solutions.

Julia: Okay. What are they?

Daniel: Well the first one is a spot factoring solution. The second one
is whole of turnover debtor finance, and the third one is
partial ledger debtor finance. We’re going to look at the
differences between them from a borrower or a client point of

Julia: I think most people would know what these are, and they pretty
much speak for themselves. But spot factoring is a one off. Some
people might not know that.

Daniel: Yeah. Spot factoring is where you just want to have the
flexibility to finance one invoice at a time. Whole of turnover
means that you’re going to finance pretty much everything on
your ledger, and you’re going to at least assign everything in
your ledger to the financier.

Julia: Right. And partial.

Daniel: Partial is where you assign your whole ledger to the financier
as security, but you only really legally assign specific debtors
in that ledger.

Julia: Okay. Well, let’s go through this table and talk about the
advantages and disadvantages for the client. So we’ll start with

Daniel: Yeah, okay. With spot factoring, let’s just look at the cost on
the basis from a per invoice point of view. So with spot
factoring it’s relatively high. Spot factoring costs can be as
high as between 4% and 12% of the invoice depending on,
obviously, whoever the financier is and also the length of time
that you need that invoice financed for. You also have to be
very careful to look at the actual terms, in the way that that
contract’s structured, because most spot factors charge on a
weekly or a monthly basis. So that means if you draw down the
fund on finance day one and the invoice is paid on week two, you
might be paying for the full 30 days of finance.

The second one is whole of turnover. On a cost per invoice basis
that’s generally the lowest type of debtor finance. But there
are some drawbacks to financing with a whole of turnover.

Julia: And partial?

Daniel: Partial is somewhere in between. It’s usually close to whole of
turnover. A lot of our clients are on a partial ledger finance
basis, and our costs can sometimes be in line with whole of
turnover and sometimes it can be slightly more.

Julia: Okay.

Daniel: We’ll get to . . .

Julia: Sorry. No, go.

Daniel: We’ll get to the reasons why in some of these next components.

Julia: Yes, excellent. Well, let’s move on to advance rate.

Daniel: Spot factoring, the advance rate is pretty good considering you
may only be wanting to finance one invoice with that financier.
So it’s around that 60% to 5% advance rate.

Julia: Okay.

Daniel: Whole of turnover you get a great advance rate on there, but
you’ve got a lot of debtors usually finance with that financier.
Therefore, that pushes down the risk significantly. So it’s
usually around 80%. I know some confidential invoice discounters
they might advance up to 90% of the invoice.

Partial generally it’s around 80% depending on the concentration and
the spread that that financier’s got at the time. So as with
whole of turnover, that 80% will move down from there. For
example, if you’ve got one debtor, you might only get $0.24 on
the dollar, or you might only get $0.50 on the dollar, depending
on how solid that customer is and what kind of paperwork is in

Julia: Okay. Contract.

Daniel: Yeah. So what I mean by contract is: Is there a contract? Is
there a minimum term that you’ve got to finance those invoices
with the financier?

The answer to that is pretty obvious with spot factoring. It’s
exactly what it says it is. It is spot factoring. It’s one off.
You do one invoice, and you just pay the fee on that invoice and
then you can move on with your business and do whatever you want
to do.

Whole of turnover and partial, generally most funders want to do a 12
month contract. The reason why they want to lock you into that
contract is because a lot of the work that’s in setting up these
debtor finance facilities is at the front end, and so you need
to keep that client for a number of months to be able to recover
that cost and recover the risk. Even though we do charge all the
costs, it doesn’t really cover all the time spent by the
financier setting up that account.

Julia: And that’s also a good point because that’s why it’s a bit more
expensive to do a one off, because you still have got to do all
that back end work, and it’s just for one invoice.

Daniel: Correct. That’s right.

Julia: So that’s why they’re going to raise the prices.

Daniel: Yeah, absolutely. I mean arguably even though the spot factor
is charging a lot more on a per invoice basis, that doesn’t mean
they’re actually more profitable because you’ve got to adjust
your return for the risk. So spot factoring, from a funder’s
point of view, it’s really, really risky because you’ve got one
invoice. You’ve never dealt with that customer before. Who knows
when they’re going to pay that money.

Julia: It’s like putting all your eggs in one basket.

Daniel: Potentially, yeah, it is. So arguably I think the spot . . . I
mean we used to do a lot of spot factoring here years ago, but
we don’t do it anymore because it’s just too risky, and you
really can’t charge enough money to get that return.

Julia: Okay. All right. Let’s move along. Are you finished? You
already talked about that. So audit?

Daniel: Yes. So with spot factoring, sorry I should say, what do I mean
by audit? That’s a level of verification that the funder does on
the invoice prior to advancing against it to the client. So with
spot factoring, it’s very heavy. So because they’ve got one
invoice, one customer, they’re going to want to make sure that
that debtor or that invoice is assigned to you to be able to
buy. It’s a true sale. So they want sign off for some. It’s
quite intrusive, which it should be rightly so.

Julia: Yes.

Daniel: Whole of turnover, there’s auditing done at the start. They
might look a little bit more at your financials as a client. So
once it’s up and running, they’ve got quite a bit of spread. The
order that’s ongoing is a lot less once the facility’s on foot.

Partial is in between, because you don’t have all that security
that whole of turnover has. They’ve got more debtors, more
customers usually being funded, more invoices being funded. So
they’ve got other ways to get out of the deal should it go bad.
With partial debtor finance, you’ve got moderate risk. So your
audit it’s going to be not as heavy as spot factoring, because
you do have a bit of spread on your ledger, but it’s going to be
a lot more than whole of turnover.

Julia: Okay. And let’s just finish this up now with flexibility. Spot,

Daniel: Yes, spot’s very flexible. Those guys can be get in, settle
real quick, get out, and they can look at situations that other
funders might not be so keen on. Generally, spot factors are
smaller, mom and dad type operations that are funding those
invoices. So therefore they can be really flexible because
generally you’re talking to the decisions maker, and so that
guy, if he knows you and understands the situation, he can make
a really quick credit decision.

Whole of turnover, that’s a lot less flexible in terms of if you
don’t fit in the box of the funding and the invoices are
disallowed, it can be a little bit restrictive in the sense of
what they will finance and what they won’t finance.

Julia: Okay.

Daniel: And partial, once again it’s in between. A lot of the partial
funders, such as us, we do have that facility, you can ring us
up and get a credit decision reasonably quickly. We are
moderately flexible around those sorts of issues.

Julia: Okay. All right, excellent. If you’d like to know more or you’d
like an appointment . . . do you have another point?

Daniel: Yeah, I do have one more point to make, which is an important
point. A lot of what I’m pointing out here are the differences
between these three types of facilities. But often a client
doesn’t have a choice in between with what they’re going to take
or what they can use. So a lot of the time you just take what
you can get as a client or what the funder can qualify you for
or your broker can qualify you for, and you just have to, in a
sense, suck it up. But here are the definite nuances I think
from my experience that are prevalent in those types of

Julia: And I guess the financier would advise you what’s best for you
anyway. Right?

Daniel: Sometimes. Usually you would use a good finance broker, or a
lot of people use outsource CFOs, financial controllers or
internal financial controllers. If you do have a choice between
all of them, you really want to be making that decision
yourself, because if you’re in a contract, once you’re in a
contract with a funder, then you’re in the contract. It’s very
difficult to get out of these things because the funder has got
to recover his costs and his risk, his return on his risk for
doing the deal. So, yeah, you want to make sure you get it right
from the start.

Julia: Okay. Excellent. If you’d like an appointment, call the office
on the 1300 number. Thanks for watching.

Daniel: Thank you.

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