Introduction to Debtor Finance:
What is Debtor Finance and How Does it Work?
A major challenge business face today is the delay between delivering goods/services and receiving payment. This common practice creates tight cash flow periods for businesses. This is not a temporary condition as most small businesses face it throughout in their lifetime. So, it is more important than ever that businesses get paid on time.
Debtor finance is one of the solutions which is suitable for such tight cash flow periods, allowing businesses to get access to instant cash which is locked up in the unpaid invoices. But what is debtor finance? How does it work? Does your business need debtor finance? Let us find out.
What is Debtor Finance?
Debtor finance is a funding solution that enables businesses to access cash tied up in their unpaid invoices. Instead of waiting for customers to settle their payments on 30th, 45th or 60th day, businesses can receive a significant portion (up to 90%) of the invoice value. The remaining 10% is paid once the customers settles the invoice, minus a small fee.
Debtor finance is the right solution for businesses that sell goods and services on credit, it helps them bridge cash flow gaps easily and quickly to maintain smooth operations.
What sets Debtor finance apart from traditional financing options is that it is not a loan, it is a cash flow solution which doesn’t add any debt on the business.
How Does Debtor Finance Work?
- Issue an Invoice: Business issues invoice for their goods/services
- Submit to Financier: Business shares the issued invoice with the debtor finance provider
- Receive Funds: The provider shares a significant percentage (up to 90%) of the invoice value
- Customer Pays: Customer pays the invoice to the debtor finance provider
- Balance Settlement: The financer shares the remaining balance to the business, minus their service fee
Who can Benefit from Debtor Finance?
Debtor Finance is ideal for businesses that commonly face cash flow gaps.
- For MSMEs, debtor finance helps maintain working capital to fund daily operations.
- Businesses in industries like manufacturing, wholesale, logistics, where long payment cycles are common can benefit from debtor finance.
- Growing businesses requiring immediate cash flow without increasing debt.
Types of Debtor Finance
Debtor finance is primarily of two types, categorized by how invoices are used to access funds:
- Invoice Factoring: In this invoice financing model is a collateral free finance where the factoring company purchases unpaid invoices and share the invoice value (up t0 90%) to the business. The factoring company also manages collections from customers, allowing businesses to focus on their operations instead of running after payments.
- Invoice Discounting: Business retain control of collections while using unpaid invoices as collateral to get access to funds.
These two are further divided in two groups based on which invoices are used to access to funds.
- Single Invoice Finance: Allows businesses to raise funds against one specific invoice instead of the entire ledger.
- Selective Invoice Finance: Offers flexibility by allowing businesses to choose which invoice to finance depending on the needs.
What are the Benefits of using Debtor Financing?
- Improved Cash Flow
- Quick Access to Working Capital
- No Additional Debt
- Supports Business Growth
- Flexible Financing
- Better Supplier Relationship
5 Signs your Business Need Factoring Finance
Is Debtor Finance Right for my Business?
- If your business offers extended payment terms to your customers, then you can use debtor finance to accelerate access to funds instead of waiting for payment.
- If your business constantly faces cash flow challenges and delayed payments from customers, then debtor finance can help you bridge this gap.
- If your business needs working capital to scale quickly, debtor finance can be a viable option.
- High volumes of unpaid invoices make debtors finance an effective MSME Finance solution.
- Factoring finance enables businesses to access funds quickly while outsourcing collections, making it a convenient solution.
Conclusion
If you need immediate working capital or want to unlock cash flow without adding debt, debtor finance can be the right solution for your business. By assessing your cash flow needs and choosing the right financing model, you can make informed decisions to sustain and grow your business efficiently.
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Disclaimer: The information provided in this blog is for general informational purposes only. The specifics of financial products, including eligibility, terms, and benefits, may vary based on multiple factors.
121 Finance does not guarantee the accuracy or applicability of the information for every individual case.