With all loans, the bank will be looking for assurance that it will recover its money and because of the higher risk with debtor financing, the interest charged is higher and the bank undertakes a more rigorous due assiduousness process than it might when fixed assets are used as security.
If there are major bad debts, questionable clients or old debts, then the financier will not lend against these sums and you need to recognize that you may be lent less than the book value of your debtors.
You should also be aware that this financing may be restricted if you have contracts with customers that have restraining assignment clauses in those contracts. Many business owners enter into a contract with a key customer, numeral customers, where the contract specifically states that neither the service nor the debt can be assigned. This will mean that you cannot use debit financing with those customers.
Pros
€ It is an invisible form of financing to customers; as long as the process is managed effectively the customer need not know.
€ Cash flow funding without securing over the assets of the owner or the business.
€ Leaves fixed assets obtainable for other forms of security if needed.
Cons
€ financing had the stigma of 'factoring', but this is changing. Factoring was seen as a last financing resort for businesses with poor cash flow and on the edge of insolvency. Debtor funding is not the same and is coming into its own as an alternative form of funding.
€ Higher interest charges than finance held over assets.
Debtor Financing Questions
€ Do you have a strong client base and confidence that this will continue?
€ Do any of your customer contracts have assignment clauses?
€ Are you happy to pay the higher interest rates associated with financing?
€ Have you considered using your personal or fixed assets to obtain short-term funding?
€ Are you prepared for the bank to conduct due diligence on your business?
€ Do you have a strategy for maximizing the cash injection into your business?
Debtor Finance or Cash flow Finance can have significant benefits for both small and larger businesses, by providing a flexible line of credit based on outstanding invoices. Most businesses who sell their goods or services to additional businesses offer credit terms of 30 days or more in order to secure orders from customers. Basically, these invoices can take up to 60 days or more to be paid. This delay reduces the business's cash flow, and can limit the growth of the business.
Read on to find out what Debtor Finance is, how it works, and the benefits of Debtor Finance for a wide range of business types and sizes.
What is Debtor Finance & How Does Debtor Finance Work?
Debtor Finance, also known as Cash flow Finance, Invoice Factoring and Invoice Discounting, allows businesses to access funds owed to them in outstanding invoices before the debtor actually pays.
Debtor Finance provides a business with quick access to up to 90 per cent of the funds owing in outstanding invoices, with the remaining percentage paid when the customer pays the invoice.
As a business delivers goods and services to its customers, the invoices (trade debts) raised are forwarded to the financier. The financier then verifies the invoices and advances up to 90 per cent of the unpaid invoice value within 24 hours. The business can then access the available funds as required.
The remaining percentage of the invoice is paid to the business once the customer invoice is paid in full, less a small fee.
The business can retain control of the accounting and collections functions, or they can opt for the financier to control this function as part of a full service solution. Most Debtor Finance financiers offer online access to reporting, allowing the business to track payment receipts.
If there are major bad debts, questionable clients or old debts, then the financier will not lend against these sums and you need to recognize that you may be lent less than the book value of your debtors.
You should also be aware that this financing may be restricted if you have contracts with customers that have restraining assignment clauses in those contracts. Many business owners enter into a contract with a key customer, numeral customers, where the contract specifically states that neither the service nor the debt can be assigned. This will mean that you cannot use debit financing with those customers.
Pros
€ It is an invisible form of financing to customers; as long as the process is managed effectively the customer need not know.
€ Cash flow funding without securing over the assets of the owner or the business.
€ Leaves fixed assets obtainable for other forms of security if needed.
Cons
€ financing had the stigma of 'factoring', but this is changing. Factoring was seen as a last financing resort for businesses with poor cash flow and on the edge of insolvency. Debtor funding is not the same and is coming into its own as an alternative form of funding.
€ Higher interest charges than finance held over assets.
Debtor Financing Questions
€ Do you have a strong client base and confidence that this will continue?
€ Do any of your customer contracts have assignment clauses?
€ Are you happy to pay the higher interest rates associated with financing?
€ Have you considered using your personal or fixed assets to obtain short-term funding?
€ Are you prepared for the bank to conduct due diligence on your business?
€ Do you have a strategy for maximizing the cash injection into your business?
Debtor Finance or Cash flow Finance can have significant benefits for both small and larger businesses, by providing a flexible line of credit based on outstanding invoices. Most businesses who sell their goods or services to additional businesses offer credit terms of 30 days or more in order to secure orders from customers. Basically, these invoices can take up to 60 days or more to be paid. This delay reduces the business's cash flow, and can limit the growth of the business.
Read on to find out what Debtor Finance is, how it works, and the benefits of Debtor Finance for a wide range of business types and sizes.
What is Debtor Finance & How Does Debtor Finance Work?
Debtor Finance, also known as Cash flow Finance, Invoice Factoring and Invoice Discounting, allows businesses to access funds owed to them in outstanding invoices before the debtor actually pays.
Debtor Finance provides a business with quick access to up to 90 per cent of the funds owing in outstanding invoices, with the remaining percentage paid when the customer pays the invoice.
As a business delivers goods and services to its customers, the invoices (trade debts) raised are forwarded to the financier. The financier then verifies the invoices and advances up to 90 per cent of the unpaid invoice value within 24 hours. The business can then access the available funds as required.
The remaining percentage of the invoice is paid to the business once the customer invoice is paid in full, less a small fee.
The business can retain control of the accounting and collections functions, or they can opt for the financier to control this function as part of a full service solution. Most Debtor Finance financiers offer online access to reporting, allowing the business to track payment receipts.
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