The concept of debtor finance is an umbrella term for the scenario where one uses their account receivables in order to secure a line of credit. The reason why this is so revolutionary is due to the fact that it gives you an opportunity to improve your cash flow and finance your business by relying on your own income, rather than having to keep getting deeper and deeper into debt until your business becomes profitable once again. What you owe from your creditors is merely what you’re owed by your own debtors. Here are several benefits of this type of finance for small businesses.
1. The importance of your cash flow
The first major financial problem that every business faces in their infancy are the issue regarding the cash flow. On the one hand, your company is making a profit, however, you seem to lack funds to cover your operational expenses. Why is this so? Well, mostly because the majority of your profit is in the form of account receivables. This means that while you’ve earned this money by providing a service or selling (delivering) a product, you need to wait until you can collect this money.
Therefore, on paper, you have the money but in reality, you’re all out of cash. The reason why this is such a big of an issue is due to the fact that you still have so many financial obligations to settle, on your own. You have to pay salaries to your employees, you have to pay your suppliers, cover your rent and utility bills and more. These parties (parties that you couldn’t run your business without), have their own needs and obligations, which is why the excuse that you haven’t received the full payment yet, won’t cut it. Fortunately, this is where debtor finance options can come to the rescue.
2. Avoiding unfavorable alternatives
Another major advantage of this finance methods is the fact that it can help you acquire necessary funds without having to sell your invoices. Sure, selling an invoice is a great way for you to provide your business with a capital injection but it is also substantially lowering your income. You usually get about 85 percent of the money right away, pay a fee (that’s most commonly in the 1,5 to 5 percent range) and have to wait for the rest of the money (the last 10 to 13,5 percent of the invoice value). This way, you can avoid this measure altogether.
3. This doesn’t exclude other options
One of the most important things you need to understand here is the fact that just because you’re actively using a debtor finance option, this doesn’t mean that you can’t add a couple of other solutions to the mix, as well. In fact, by combining this finance method with others, you’ll achieve the greatest effect. For instance, some financial organizations like Classic Funding Group are offering clean energy finance. So, provided that you believe that your business can qualify for this, there’s nothing to prevent you from applying. Government grants and incentives are also a great source of funding.
4. Great for those with poor credit score
You also need to understand that a debtor finance option is a secured business loan, which is why a high credit score isn’t necessary. The way in which this works is that your account receivables act as collateral. Due to the fact that the debtor knows that you’ll be able to pay (after all, the money from your customers is on its way), they will be more than willing to approve this line of credit. This, on the other hand, doesn’t mean that you should just forget about your credit score altogether, due to the fact that improving it gives a boost to your organization as a whole.
5. The line of credit
One of the aspects of debtor finance options that we’ve neglected in the post so far is the fact that it’s a line-of-credit-type of loan. This means that it’s a go-to method whenever your business needs some additional funds but there’s no reason for you to apply for a bigger loan (preemptively) just because you believe that you’ll need more money in the future. In fact, this is one of the main reason why so many enterprises prefer going for a line of credit rather than opting for a traditional loan.
Finally, there’s no denying that debtor finance is simply business-friendly. First of all, it’s flexible and scalable. This means that as your profit grows, the line of credit fund grows as well (remember, you can borrow as much money as you’re owed). Second, it helps you retain equity in your business and allows you to improve your cash flow quite effortlessly. Finally, when dealing with creditors and suppliers, you gain more negotiating power, seeing as how you’ll never be desperate for cash.
The very last thing you need to take into consideration is the fact that the more options you have, the better position you are in. This is universally true, regardless if you’re ever actually forced to use these options or not. Debtor finance options are one of the mechanisms that you can use to keep your business afloat and to ensure the reliability and consistency of your operations. So, before you carry on with your entrepreneurial plans any further, check whether you’re eligible for debtor finance.
Guest author, Lucas, is a business consultant with a passion for writing. Doing his research, exploring and writing are his favorite things to do. Besides that, he loves playing his guitar, hiking, and traveling.