If you're a small business owner, you know how frustrating it can be when your cash flow is tight, despite having a plethora of unpaid customer invoices pending. Invoicing clients and waiting for payments is part of running any business. Still, sometimes these delays can become much more complicated to handle than usual. Thus, they put you in a tough spot where bills are piling up quickly on one side while incoming revenue remains stagnant on the other end. Fortunately, a practical solution called debtor financing can help deal with cash flow constraints during these tricky periods.
Debtors’ financing is a process that allows businesses to borrow money against their outstanding customer invoices' value. This lending approach provides quick access to capital without requiring the borrower to damage their existing credit history or increase personal debt risk.
The debtor financing application process typically involves completing an application form, submitting evidence of unpaid invoices/accounts receivables, and then waiting for confirmation from lenders or finance companies. Once approved (usually within 24-48 hours), businesses could receive up to 80% of their invoice's total value upfront and pay nominal service fees.
Businesses that opt for debtor financing will need to sign a contract outlining repayment terms before receiving funds. Furthermore, some lenders may require collateral as well. However, most times, they use company assets such as inventory or equipment instead of requesting personal property holdings from entrepreneurs themselves.
One common type of debtor finance is factoring The practice wherein businesses sell their outstanding customer invoices/accounts receivable at discounted prices to third-party financiers like banks or private lenders. The lender takes over responsibility for collecting each invoice amount from customers until it has been paid in full.
Another form of debtor finance – invoice discounting – works similarly. But, it does differ slightly from the factoring process. Businesses maintain indirect responsibility for collecting invoices and account receivables in invoice discounting.
In comparison, selective invoicing involves businesses choosing specific bills or invoices to discount. This is often better than their entire portfolio of customer debts.
Debtor financing enables businesses to get funds sooner than relying solely on client prompt payments and banks' traditional loan application approvals. It provides flexibility in cash management. This is a crucial aspect that can help small businesses thrive while overcoming periodic funding droughts due to tight cash flow periods. Especially, when they often occur throughout the year.
Moreover, debtor financing fees are usually only applied when you borrow money. Thus, it is not a continuous ongoing expense like other credit facilities. Many financial institutions also offer flexible repayment schedules allowing minor interests over longer terms. This helps companies better manage their finances while weathering challenging moments much more quickly.
Many business owners needing quick access to capital may shy away from considering debtor financing loans. This is due to misconceptions surrounding ‘borrowing against unpaid clients'. Still, the truth is that if executed correctly and conscientiously aligned with responsible business practices – exploring debtor finance options could help drive profitability within any commercial venture. The primary advantages are:
As mentioned earlier, selling accounts receivable means accessing existing monies owed faster than waiting indefinitely for clients' remittance processing and transferring into your bank account.
A lot less risky than unsecured personal loans, which often require giving up collateral items such as property deeds or titles before receiving funds.
Debtor finance interest rates are typically lower than yearly renewal loans associated with banks. This is because fund uses tend not to extend beyond outstanding customer invoices/account financial receivable totals.
Borrowers have more control over the loan use and may choose which invoices or accounts receivable to sell for quick funds. This can include specific clients who take longer than others to pay instead of defaulting on other debt obligations.
Debtor financing has no hidden fees or secrets. It is an entirely legitimate option that provides businesses with a valuable alternative source of finance. Thereby, filling gaps in working capital funding. These result from cash flow constraints during seasonal lulls and other reasons for unpaid customer invoices. The next time you struggle with tightening regulations and experiencing ongoing cash problems, consider debtor finance as a solution. After all, it could fix your business needs!
