When a business wants to grow its offerings, it will generally increase its sales. However, a key problem many businesses face when increasing sales, is the lengthy wait time that can occur between sale and payment. As a business continues making sales, more and more working capital ends up in accounts receivable, inaccessible to business owners, meaning less funds are available for their business operations.
Not having enough working capital available for business operations can cause major cash flow issues for many growing enterprises. To bridge the gap between sale and payment, a number of businesses will turn to debtor invoice financing.
How Debtor Finance Works
- Debtor invoice financing exists after a business has provided goods or services to a client. Once the business issues the client with an invoice, they will have a gap in their cash flow while they wait for payment.
- Rather than waiting for payment, debtor invoice financing means the business will sell their invoice to a bank or lender at a discount.
- The finance provider will then immediately provide the business with an agreed percentage of the amount of the invoice to help them bridge their cash flow gap.
- After the client has settled their outstanding invoice, the business will receive the remaining owed balance, minus any admin fees from the debtor invoice financing agreement.
Advantages of Debtor Invoice Financing
There are a number of advantages to debtor invoice financing for businesses that are experiencing cash flow management issues as a result of delayed invoice payments.
Improved cash flow is an important drawcard of debtor invoice financing. This form of financing means businesses can access money that is tied up in invoices sooner to ensure they can continue to cover their operating expenses.
With debtor invoice financing, businesses are able to offer their clients extended payment terms. By offering extended payment terms, a business is able to remain competitive in the marketplace, win new clients, and decrease the financial impact of generous payment terms.
Debtor invoice financing is a good option for businesses without a strong credit history. This form of financing is based on the creditworthiness of a business’s customers and clients, rather than the business itself. Due to the added no-collateral requirement benefit, debtor invoice financing is also accessible to a wider range of businesses.
Disadvantages of Debtor Invoice Financing
As a short-term financing solution, debtor invoice financing also involves some important drawback considerations, like financing fees, accessibility, and the potential for recourse.
Although no collateral is required for debtor invoice financing, a number of bank or lender fees still exist. These fees are often included in the initial agreement, and can involve a factor rate, transaction fee, and an account maintenance fee.
Additionally, not all businesses will be capable of accessing debtor invoice financing. If a business’s clients have poor credit history, the business may not be able to get debtor invoice financing. This is because the clients’ creditworthiness is assessed for the loan, rather than the business.
Finally, if a business’s client defaults on their payment, the finance provider may still seek recourse from the business. Due to this risk never fully being controlled, bad debt protection will often exist for an additional fee.
Should Your Business Consider Debtor Invoice Financing?
Debtor invoice financing is 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.
Other reasons a business may consider debtor invoice financing include when access to working capital is limited; when a business is struggling to commit to new projects; when customer relationships are getting awkward; when a commercial loan isn't enough to cover cash flow gaps; when a commercial loan isn’t flexible enough; and when a commercial loan application has been rejected.
It is important to consider the various advantages and disadvantages of this form of financing before making a decision. Every business has different requirements based on its industry, needs, and long term financial objectives.
Get Competitive Business Debtor Invoice Financing Rates - Reach out to the Expert Loan Specialists at Jade Finance.
As an integral part of our commercial loan portfolio, Jade Finance provides effective Debtor Invoice Funding to support businesses on either a long-term ongoing basis, or to solve short-term cash flow issues. Debtor Invoice Financing can provide your business with immediate funds by way of the initial payment from the lender when you raise the invoice.
Let your Jade consultant establish a debtor invoice funding facility with a lender perfectly matched to you and your business profile. Give us a call to receive a quick quote, or connect with us online.
