Debtor financing involves borrowing of funds for the purpose of keeping the company running, to develop the company. Also, debtor financing is a broad description describing the type of financing which uses the traded receivables as collateral to secure the loans. It really helps through the form of cash advances or a line of credit for the business, which is secured by the value of the unpaid bills in a company as accounts receivables book. Businesses sell outstanding invoices on accounts receivables to the receivables financing company to get access to needed working capital.
When businesses need to unlock cash flow, selling unpaid invoices may be an option for third-party lenders, which will advance funds based on the value of these invoices. Businesses can opt for debtor finance, or invoice finance, to immediately unlock money that is owed them on unpaid accounts receivable. For businesses looking to extract funds for uncollected invoices, debtor financing provides a convenient option for mitigating company risks and providing stable cash flows.
By funding invoices that are not paid quickly, debtor financing speeds up your income–it increases working capital and gives your business the funds it needs to pay suppliers, salaries, or other expenses.
A factoring firm advances 80%-85% of invoice value once an invoice is submitted for funding. You send an invoice to a finance company; they will give you a loan of up to 95% of invoices value.
The customer gets 80-85% of the total value of a group of invoices as available funds. When a client pays the invoice into a designated factor account, the factor deducts their fees, interest and advances on the amount sent in, then pays the remainder back to the business. If an invoice or accounts receivable remains unpaid for any longer than is specified in the debtors financing agreement, the factor has recourse against the company for funds that were advanced, meaning that it may recover money from the company.
With factoring, the factor (the institution who advances funds on invoices) participates in company management, including sending statements to a company’s customers and calling them, as needed, either to confirm invoices and deliveries or to monitor debts which are past due. The fees involved in Factoring and Discounting vary depending on the value of the invoices, the length of the financing arrangement, your customers credit rating, and the type of debt being financed. Within the scope of discounting and factoring, there are two major types of debtors financing services, differing by the type of invoice used to access funds.
Unlike invoice factoring, your business continues to manage the invoice bookkeeping and collections, meaning that invoice discounting is typically best for larger companies that have their own in-house credit and accounting departments. Generally, the invoices are not audited by a funding provider in invoice discounting, as your company’s collection and handling of the invoices is handled internally. Invoice discounting can provide privacy insofar as your customers do not or cannot tell if you are using a financing company for the collection of invoice payments.
If you prefer to keep your financing relationships confidential, invoice discounting arrangements may offer a way of obtaining financing without disclosing that the financing company is involved. If you need an ongoing funding source because, say, your company is growing rapidly, invoice discounting could be a good fit, if you are capable of managing the collection of payments. Because there are no interest charges or other costs associated with setting up other types of finance, invoice financing can often be more cost-effective than taking out an overdraft or an unsecured business loan.
If you can leverage money tied up in your debtors account to power your companies growth, invoice finance could be an efficient funding solution. Debtor financing is a form of corporate financing that allows businesses to overcome the cash flow issues that might hold them back. For start-ups and established businesses, debtor financing can be used to cover bills, negotiate discounts on payments in advance with suppliers, and provide net terms to attract new customers.