The success of one company depends on a whole array of different factors, most of which are not under the influence of the business owner. That puts an even greater pressure that we deliver in the areas where we actually have control over. Cash flow has to be one of the most important business facets of this type.
And truly, the main goal of every company needs to at any moment earn more than it needs to spend on the overhead and production costs. If these requirements are not met, the operations will be brought to a halt and the business will sustain substantial financial blows adding to the cash flow problems that brought it there in the first place.
Let’s see how these problems can be avoided with the funding model known as debtor finance.
What is debtor finance?
One of the most important causes behind the cash flow issues we have mentioned in the introduction is the company’s inability to collect the invoices in time to put the raised money back into production or the overhead costs. Even though this scenario may seem unlikely, recent research suggests that as much as 82% eventually fail due to problems of this type.
The main problem here is that when they issue an invoice the companies usually give another party a time frame between 30 and 90 days to settle the debt (longer payment terms are usually reserved for higher invoice values) which is a period in which the companies can experience substantial financial setbacks and require an immediate financial injection to be able to keep going.
That brings us to the debtor finance that essentially represents that allows you to receive an advance on the pending invoices. In most cases, the debtor finance company will get up to 85% of your invoices paid within only 24 hours allowing you to reinvest the money, pay suppliers and stock inventory. To put it simply, debtor finance allows you to access the money you have already earned, but faster.
The types of debtor finance
At this moment, the debtor finance covers a couple of different service types but we can divide all these varieties into two main groups:
- Debt factoring
- Invoice discounting
Debt factoring is a debtor finance model primarily oriented at small and medium companies looking to patch up smaller cash flow gaps in the shortest possible time and with as little involvement as possible. In this case, your company needs only to send invoices to the factoring company. The service vendor then collects the debt when the invoices are due. The payments are usually received in two installments – one when you submit the invoice and the other when the customer settles the debt.
This type of service is usually employed by larger legal entities with established collection departments and dedicated bank accounts. Unlike the previous case, invoice discounting keeps the responsibility of collecting the invoices within your company and the arrangement works more as a traditional loan. You invoice the customers, send the invoices to the finance company, get the loan and return the loan when you collect the payment from your customers. The line of credit increases as you raise the invoices and decrease when your customers make the payments.
The benefits of debtor finance
As we can see, debtor finance helps the companies to overcome temporary financial difficulties, patch up the cash flow gaps and allow the companies to resume their operations without any interruptions. This simple service, in turn, creates additional benefits your company can leverage to its advantage.
Powerful promotional and CRM tool
These days, the business world is very competitive and every advantage to lure in new customers can and should be taken advantage of. With that in mind, the ability to extend invoice terms can be used as a powerful way to promote your business online and attract new prospective customers. Debtor finance can be used in the same manner in the case of customer relationship management.
Endless growth opportunities
In most cases, growing your company and using the sudden market opportunities means stretching the resources to the point of breaking under even the slightest external pressure. Debtor finance loans can go a long way in alleviating these growing pay and allow you to exploit market opportunities without bringing your organization to the edge of bankruptcy.
Easier to get than other financing options
Last but not least, we have to mention that the business financing options are usually very hard to obtain and come with high-interest rates requiring funds that can be better spent on other activities like digital marketing. One of the greatest benefits of debtor finance is that the loan can be obtained even without a convoluted approval process at a fraction of the overall price.
We hope these few considerations give you a general idea about the debtor finance loans and the way they can help your company overcome temporary financial obstacles and even set up the foundations for sustainable growth. Even if we don’t give them too much attention, the seemingly small cash flow problems can bring your business to a grinding halt. Debtor finance presents one of the simplest and easily accessible solutions to this problem so it’s definitely worth a try.