Debtor financing has been gaining popularity the world over as a way to finance growing businesses that are in need of working capital. The solution allows businesses to finance slow-paying invoices, providing immediate funds to meet the company’s current needs. Debtor financing provides a flexible line of credit based on outstanding invoices.
Businesses need debtor financing because the majority of them who sell goods and services to other businesses usually offer their customers credit terms of at least 30 days to secure orders. Realistically, these invoices can take as much as 60 days (sometimes more) to be paid. It is this delay in payment that reduces cash flow in the business and limits growth.
What is debtor finance?
Debtor finance is a general term referring to all types of products that fund a business by financing its invoices. Some of the terms used to refer to these products include Debtor factoring, invoice discounting, discounted debtor purchasing among others. This allows a business to access funds that are owed to them in outstanding invoices before payment by the debtor.
Types of debtor finance
There’re two major types of Debtor financing arrangements:
1. Debtor factoring. This solution improves a business’ cash flow by turning its invoices into working capital. Debtor factoring can provide quick access to up to 90% of the value of the invoices submitted. The remaining 10% is paid, less charges, once the full payment of the invoices has been collected.
Debtor factoring is usually provided as a full-service solution. This means that it includes additional services like debt collection, sales ledger administration and reporting for companies that do not have their own credit management resources.
With this type of cash flow solution, the business can either choose to disclose the deal with their customers or keep it undisclosed. If so desired, the business can also continue collecting its own debts.
2. Discounted debtor purchasing. In this type of debtor financing facility, the financier buys 100% of the client’s merchant debtor ledger at an agreed price after invoice evaluation. In this kind of facility, the deal is not made known to the client’s customers and this enables them to maintain their relationships with their clients. Debt collection duties are left to the client as well if they so wish. The major difference between this type of debtor financing and debtor factoring is that it’s non-recourse.
When debtor financing is non-recourse, it means that if the customer defaults in payment, the debt will not be transferred to the client by the financier.
It is important to undertint the differences between these two types of debtor financing. CreditWorks provides a non-recourse debtor purchasing (100%) facility. We do not provide debtor factoring.
At CreditWorks we know that a business cannot grow if it’s facing cash flow challenges. Our friendly and flexible financial solutions will help you improve cash flow so that you can concentrate on other important issues, like growing the business rather than chasing after debtors.
Advantages Of Using Debtor Finance
Using debtor finance benefits your business in the following ways:
- Quick access to funds. A debtor finance arrangement can be set up, approved and funded in just a few days. Banks will typically require more time to process loans due to lengthy credit reviews which could cost your business a lot in terms of opportunity cost and lost goodwill from customers and employees.
- It does not require collateral. Because this method of financing is primarily based on your accounts receivable, no additional collateral is required. This, unlike other sources of financing, reduces your risks significantly by providing the much needed cash without any collateral.
- It’s cheaper than equity. Most businesses turn to equity investors when in need of financing for investment and expansion. Equity investors, however, require higher returns than the cost of debtor finance. New equity contributions also dilute the ownership stakes of existing owners and could even lead to a shift in control of the business. A debtor finance arrangement does not have any dilutive effect on the company’s shareholders.
- Frees up people and resources for other tasks. Debt recovery is a difficult task that ties up a lot of resources and man hours. When you choose debtor finance, you can opt to leave debt recovery duties to the financier. This frees up your workforce so that they can focus on other important endeavours such as client development, marketing, and sales.
- Protection against bad debt. Debtor finance can be provided on a non-recourse basis. This means that the financier takes on all the risk of bad debts and will not transfer this to you. In this arrangement, once the debtors have been bought, all the money is yours to keep.
Ask how we can help: https://www.creditworks.co.nz/contact-us/