Basically, most companies that provide goods or services and raise invoices with normal payment terms, usually between 30-90 days, are able to get an advance on the monies owed. If your business has a long working capital cycle and is cash-hungry, then debtor finance could be a suitable option for keeping cash flowing.
What are the main benefits of debtor finance over, say, a traditional loan?
For companies that are growing fast, it allows them to access working capital a lot sooner. As a business grows with increasing sales, the invoice ledger grows accordingly and with Debtor Finance you’d be able to tap into that as a source of funds to help with working capital. It’s more flexible compared to a bank loan or an overdraft, which are usually limited by the amount of attached security. It gives the company better control over its cash flow.
For example, if a company had a $200,000 overdraft limit and needed to access some additional funds, it wouldn’t be able to go above that. But if it had $400,000 in debtors, then with debtor finance it would potentially have access to about $320,000.
I feel that one of the hidden benefits is that debtor finance enforces better behaviors within a business – better credit control. Knowing that they’re bound by certain requirements of the financier, Clients tend to pay more attention to their paperwork, their invoicing and their collections, rather than just doing the work, raising an invoice and leaving it at that, hoping that their customer will pay on the due date.
‘ As a business grows with increasing sales, the invoice ledger grows accordingly and with Debtor Finance you’d be able to tap into that as a source of funds to help with working capital. ‘
What industries are best suited to debtor finance?
Typically debtor finance suits those businesses who have a long lead time between purchasing their inputs and the final invoice when the sale is completed. Industries such as transport, manufacturing, wholesale businesses and the fashion industry are good examples.
Likewise, not all industries or businesses are necessarily suited to debtor finance. Sometimes the make up of the ledgers just won’t suit such as when there are certain contractual obligations in the work being done. So at a fairly early stage in the process when a finance company is looking to fund the ledger, they will review it and understand the nature of the work etc. If it’s unsuitable, it won’t proceed.