According to AR Cash Flow , businesses are constantly looking at ways to control cash flow and increase working capital and debtor finance is a working capital solution that easily tops the list. Also known as invoice discounting or factoring, debtor finance gives businesses that much needed finance based on its accounts receivables. A business can hope to receive as much as 90% of its invoice value for a reasonable fee. Here, the main point to note is that the business is not getting into debt by using this highly effective method, does not have to provide any security in the form of immovable assets, or face the hassle of time-consuming documentation and security.
Debtor finance can be easily regarded as a flexible funding solution which grows along with growth in sales. Businesses with a well established clientele must use this method of raising working capital for its flexibility and various benefits. It is literally a line of credit that is accessible to the business based on what its customers owe it. Interest rates are calculated depending on the quality of the accounts receivables and these are generally considered at par with bank overdraft rates. But there the similarity ends. Where banks expect fixed and floating charges on the business’s assets, requiring property as security, with debtor finance, the business is only using its own accounts receivables to finance itself.
When can a business use debtor finance?
Businesses looking at finance for funding high sales growth are the ideal candidates, although debtor finance can be used by just about any business that wants to access funds without getting into debt. Other situations when debtor finance can be the right solution include new business start-ups, businesses that have to meet expenses even before they receive their payments and businesses that experience a change in ownership.
The benefits of debtor finance
Debtor finance is flexible and the following benefits can be enjoyed:
- Avoiding using immovable assets thereby locking them in the business
- Better buying power
- Enhanced turnover thanks to money received
- Enjoy discounts from suppliers for timely/early payments
- Proportionate growth in the facility vis-à-vis sales growth
- Savings by not offering expensive discounts for early payments
- No risk of losing personal assets
Probably the biggest benefit of debtor finance is its ability to accelerate cash flow. For most businesses, operating costs are invariably stuck in debtor accounts and inaccessible until payments are received. With debtor finance, the business gets the cash long before payments are received from the debtor. Businesses usually put this cash to use by investing in inventory, labor or promotional activities – all of which help the business to grow. Other ways in which this cash can be used are:
- Using supplier discounts through early payments. The 5 or 7 percent gained can easily make up for the cost of debtor finance.
- The business is no longer controlled by its accounts receivables. Instead, the business has control. Consequently, debtor discounts can be avoided.
- Avoid relinquishing equity in the business in return for growth. Usually, borrowing can involve giving up equity in the business.
- Debtor finance can be used as a tool to acquire a new business.
Thus, debtor finance is the best working capital solution for business that are all set for high growth, enabling them speed up their cash flow based on their accounts receivables as security.