Why a debtor financing arrangement could be the best solution for your business.
Business owners naturally want to grow their business and that generally means increasing sales. For businesses that sell on credit terms however, the delay between making the sale and receiving payment is often uncomfortably long. And as sales increase, more and more working capital is tied up in accounts receivable instead of being available to cover operational costs, buy inventory or invest in equipment.
This shortage of available working capital is a major constraint for many growing businesses and can mean that business owners can't take advantage of the opportunities they would like to.
There is a type of business finance that is well suited to providing finance to businesses that have working capital tied up in unpaid invoices and that's debtor financing.
How debtor finance works
Debtor financing, also known as invoice financing or accounts receivable financing, is when a debtor financing company provides early payment of your outstanding invoices, or debtor ledger. This has the effect of bringing forward the cash flow that you are due to receive when your customer invoices are paid, boosting the amount of available working capital.
Your clients are invoiced as normal, and the debtor financing company provides you with up to 80% of the value of your funded invoices upfront. Once the invoices are paid, the remaining 20% is paid to you, minus fees and charges.
This form of finance is typically an ongoing business line-of-credit and because it's backed by the outstanding invoices, it doesn't require real estate security or even a long business trading history. Debtor financing can be a great tool for growing businesses with increasing working capital requirements, and can also help businesses struggling with cash flow problems due to a backlog of unpaid invoices.
How debtor finance can benefit your business
1. When your access to working capital is limited
The most common reason for a business to consider debtor finance is a lack of available working capital. Whether your sales are $100,000 or $10,000,000, your business could be suffering from cash flow issues if there is too much working capital tied up in your accounts receivable.
Without working capital, you may struggle to upgrade or repair equipment, increase marketing and advertising budgets, hire more staff, order more inventory and more. Debtor finance gives you access to much-needed funds that are already owed to you. With access to working capital, you can continue to see your business grow.
2. When you cannot commit to new projects
You’ve been requested to take on a large, and potentially very profitable project or client, however you are currently waiting on outstanding invoices. Without those funds, you’re not able to order enough products needed to fulfil a task of this magnitude, or provide the high-quality service the client is expecting.
Stagnant cash flow can severely limit a business’ ability to take on new projects or clients. Debtor finance can help free up funds from your debtor ledger to allow you to commit to bigger projects or clients and increase your revenue without fear of failure.
3. When customer relationships are getting awkward
It’s no secret that chasing up unpaid invoices can put strain on the relationship between you and your customers. The added financial stress can lead to awkward and uncomfortable situations between all parties involved, potentially hurting the relationship for good.
There is a type of debtor financing that allows you to outsource the invoice collection process, freeing up resources so you and your team can focus on other aspects of your business. This is part of invoice factoring and the invoice collections are managed by experienced professionals so relationships are preserved and debtors are often more responsive if a third-party is involved.
4. When a business loan isn’t enough
When a business applies for a business loan, its access to credit is limited by a range of factors such as past profitability, assets offered up as security and your own credit history.
While you may only be offered access to, say, $250,000 by a bank, the value of your debtor ledger may be much higher. And because a debtor financing company looks at the value of your accounts receivable and not past profitability, debtor financing can often provide more funds than business loans can.
5. When a business loan isn’t flexible
Not only can business loans not provide enough funds to assist the growth of your business, the loan itself may be constricting. Debtor financing is, generally speaking, more flexible than unsecured business loans as you can draw the funds as you need the cash flow. The amount of available funding also grows with your sales so debtor financing is a long term solution.
Debtor financing is typically an ongoing line of credit and unsecured business loans are repaid with fixed repayements over a predetermined period. Although, the sugar hit of the initial business loan can solve your short term issues, the relentless ongoing repayments can put businesses under a lot of cash flow pressure.
6. When your business loan application has been rejected
Debtor financing generally has higher approval rates than business loans as the quality of the outstanding invoices are the main determinant. Debtor financing companies are less concerned about historical profitability and the amount of time your business has been trading. In fact, debtor financing can be a good solution for businesses that have a chequered credit history or even some ATO tax debts.
Debtor financing can be a great way to release working capital that's tied up in your unpaid invoices and Earlypay is making debtor finance simpler than ever before. If you would like to learn more, please call us on 1300 760 205 or speak to your BDM or Broker.