If you want a very flexible form of funding for your business, debtor finance can be a great place to start. Start-ups or businesses that are financially recovering from specific issues like bad debt or poor cash flow can turn to debtor financing to support their operations and growth.
Debtor financing is a financing agreement in which the business can borrow or generate cash using their overdue invoices. Businesses need to maintain a good cash flow to purchase inventory, pay bills, pay wages, and meet other operational needs. However, not all customers pay on time, and that can limit a business’ ability to mobilize its production. To survive and grow, businesses can resort to convenient funding options like debtor finance.
Lenders and brokers offer debtor financing services. You can receive cash advances based on your issued invoices. You can generate funding without going through a long process and complicated paperwork.
There are various solutions that fall under the category of debtor finance including cash flow finance, asset finance, invoice discounting, and invoice factoring.
Debt factoring, also called accounts receivables factoring, is when you sell your invoices to a factoring company at a discount. With this option, you can receive a percentage of the outstanding receivables upfront, and the factoring company will be the one to collect payments from your customers. When the factoring company collects all the receivables you’ll receive the rest of the funds minus the factoring company’s fees. This is a great option if you need to bring in cash immediately without waiting for clients to settle their bills.
While debt factoring involves selling your invoices, invoice discounting is just a form of short-term borrowing, using your invoices as collateral. You can borrow up to 95% of the outstanding invoices. You’ll still be the one to collect the payments and just repay the lender once the invoices are paid, unlike invoice factoring which controls the collection process.
With recourse loans, if the individual defaults on the responsibility, the lender can go after other assets and financial accounts he/she owns. Non-recourse loans, on the other hand, are generally more favorable to the borrower since the lender can only take the assets used as collateral and nothing else.
In a disclosed funding arrangement, your customers will know that you are using a financing service while in confidential financing, the agreement will remain undisclosed. Confidential arrangements allow you to remain in control of your customer relationships, but this usually comes with higher fees and interest rates and lower credit limits. Also, it has stricter credit assessment requirements, and only established firms usually meet the criteria. However, you shouldn’t worry about using disclosed funding arrangements because disclosed financing is becoming widely accepted in the trading industry, and it’s no longer something that’s looked down upon. If anything, it shows that your company is powering ahead.
Debtor financing is the catch-all term for all kinds of financing that secure a line of credit using accounts receivables. Whichever type of debtor financing option you go for, it’s generally more flexible than overdrafts or regular bank loans.
When choosing the type of debtor financing option, if you want less work in terms of payment collection, you can choose invoice factoring. However, you’ll get less money for outstanding invoices– usually only 80-90% of the value. With invoice discounting, you get the full value of the overdue invoices, but you need to pay interest on the loan and you still are responsible for collecting payments. If you already have a solid collections department in place, you can just opt for invoice discounting. Whichever you prefer, both are great options to improve your business cash flow and operations.
Both SMEs and established companies with a lot of working capital tied up in accounts receivables can benefit from debtor finance. Many types of financing require real estate security or a long business trading history, but debtor finance is very accessible and easy to qualify for.
If new projects or opportunities present themselves yet you don’t have enough capital to support growth, you can easily turn to debtor finance. Or perhaps your collections department requires an overhaul, and there are a lot of delinquent accounts. To minimize stress, you can work with an invoice factoring company to take care of all the collection efforts.
If your business loan is not enough or your business loan applications keep on getting rejected, try debtor financing as it has a higher approval rate. Easily free up all the working capital tied up in your unpaid invoices. Make the most of debtor finance to sustain or supercharge your business.
Debtor finance is no longer just a matter of alleviating unexpected cash flow challenges but is increasingly being used as a tool for strategic growth. From startups to established enterprises, debtor finance is an adaptable and robust solution for unique business challenges.
SMEs with a turnover of at least $200,000 are best suited for debtor finances. Especially for those edging closer to the $1 million turnover mark, they need to look at debtor finance not just as a means to survive but as a chance to unlock more growth opportunities. Go beyond survival and aim for strategic growth by expanding revenue streams, facilitating mergers and acquisitions, or securing raw materials at more competitive prices. Overall, debtor finance can support both your short-term and long-term goals.
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