Debtor finance, also known as cash finance is one of the most popular financing options for growing business in Australia. It is a financial tool that helps entrepreneurs like you pay for slow-paying invoices by augmenting your working capital. The loan amount is based on outstanding invoices.
Types of debtor financing
Invoice Factoring
It is also known as disclosed finance because the customer or the debtor is informed that the invoices that shall be directly paid to the lender.
Stan, a 60 year old sole proprietor of a motorcycle parts and repair shop, needs money for the purchase of tools and payment for the utility bills. While most of his clients pay on time, he still has to wait for 90- days for them to pay in full. At present he has a $2,000 worth of verified invoices. In the given situation, Stan can apply for Invoice factoring-debt financing to obtain a loan which is equivalent to up to 90% of the collectibles.
Invoice Factoring converts your invoices into working capital, thereby increasing your cash flow to meet your business needs. You can quickly access up to 90% of your verified invoices, and you can receive the other 10% minus the fees once your customers have paid in full.
In the given example, if Stan was able to borrow $1800 he can receive the remaining amount, minus the debt financing fees and interests when all of his remaining invoices fully paid.
The debt finance company shall manage the full financing processes, gather pertinent records, collect payment and send you a copy of the payment report. You don’t have to worry about keeping tabs on collections-because the lender shall take care of it.
Invoice Discounting
It is known as confidential type of funding because the customer is not informed of the funding arrangement. The lending agency finances your outstanding receivables, provided that you have a proper credit and collection system. Unlike invoice factoring, the lender shall not be responsible in the collection of payments. You have to do the collection yourself.
If you have cash flow issues, you can apply for financing against a portion or the full amount of your outstanding receivables. Like invoice factoring, you can also access up to 90% of your confirmed invoices. You can receive the remaining balance, minus the charges once you have paid the installment. You also have the option to finance a small portion of the invoices. If you only need a small amount of money, the lender will not require you to apply for funding for the total amount of your invoices.
For example, Stan has a stable credit management section in his small motor parts and repair service center. Instead of applying for the full amount of the invoices, amounting to $2000, he only seeks to obtain 25% of the invoices. He can apply for invoice discounting to pay for his immediate business needs. But, he has to manage the collection from his paying customers since Stan is the one responsible for paying the lender.
The only apparent difference between invoice factoring and invoice discounting is the fact that the latter is only an available option to those with stable credit administration system.
Advantages of using Debtor Finance for Business
Here are some of the practical reasons to use debtor financing:
- Boost Cash Flow – You no longer have to wait for 90 days or more to receive the full payment for your sales. You can quickly turn your sales into funds within a day.
- Increase your Negotiating Power – Suppliers are more likely to provide discounts to cash buyers than buyers on credit. If you have cash you can request for discounts and probably negotiate far better deals for your supplies.
- Higher Earnings – There is no need for you to offer early payment discounts to customers. They can pay the invoices as long as you both agreed upon, but your sales will not be affected. Many businesses compromise their profits because they want their customers to pay on time. Prompt payment discounts can take a huge slice form your daily income and it would encourage many customers to slack off with their payments.
- Build Business Equity – You don’t have to sell your business equity just to access funds for business expansion; you can simply apply for a loan using your invoices and get started with your next move. By doing so, you are not only saving yourself from paying higher interest rates, you are also building your company’s equity overtime.
- It strengthens your balance sheet – By converting your collectibles into quick cash, your balance sheet would no longer suffer from backlogs until collectibles are paid. The potion of the invoices that have been financed can be considered as paid already.
If you are planning to boost your sales, strengthen your cash flow and reduce operational costs, it is advisable to apply for debt finance from a reputable lending company like ALC Commercial.
