How to Fund Your Business with Debtor Finance?
Businesses often struggle with cash flow while waiting for their customers to pay invoices. What if you can collect the tied-up unpaid invoices instantly? Won’t it be easier for you to invest in your daily operations and business expansion? This is where debtor financing can help!
By converting your outstanding invoices into cash, we at MC Finance Group offer a lifeline when your cash flow is tight. Debtor finance is best suited for businesses to meet their operational needs. In this blog, we will understand what is debtor finance, its benefits and how to choose the right debtor finance broker.
What is Debtor Financing?
When B2B businesses strive to maintain their cash flow, they find it difficult to meet their financial obligations like buying inventory, paying rent and bills, and other operational needs. However, the question arises why do these businesses suffer with cash flow? This is because not all customers pay on time, which limits business’s ability to mobilise funds.
For the survival and growth of the company, these businesses opt for flexible commercial funding options like debtor finance. This is a financial agreement wherein businesses can borrow or generate cash using their outstanding invoices.
With a debtor financing funding option (also known as accounts receivable finance), a company can take 75-90% of their due payment. It is one of the best options for short-term working capital needs. This funding option is much more flexible than traditional bank loans, which are usually limited to a specific amount and tenure.
Types of Funds for Debtor Financing
There are various types of debtor financing for businesses to get funding. It provides flexibility through several tailored solutions:
Invoice Financing:
This is divided into invoice factoring and invoice discounting. Both offer businesses access to funds with minimal fees deducted. However, the main difference between these two is that the former takes responsibility for collecting debts from customers. Whereas, the latter requires the business to handle collections themselves.
Asset-based Lending (ABL):
This works like a credit card. In this type of funding option, you can borrow money with the help of assets like overdue invoices, inventory, equipment or property. Businesses consider this debtor finance solution as a flexible option as it offers scalability based on the assets’ value.
Debtor Book Sale:
In this option, businesses can sell their entire debtor book to a financing company in exchange for immediate cash. The debtor finance broker has the full responsibility of collecting an overdue amount from customers.
Steps to Fund Your Business Using a Debtor Book
To fund your business using a debtor book, it’s essential to follow a structured approach. Below are the key steps to effectively use this funding solution:
Assess Your Needs: Start by evaluating your financial needs and identifying if you need debtor financing. Consider why you need funds, whether for daily operations, project investments, or balancing cash flow and estimate the amount required. This will tell you what kind of debtor financing will work best for your business.
Choose the Right Funding Option: Evaluate available debtor financing solutions, including invoice financing, asset-based lending, or selling your debtor book, to find the best fit for your business model. Different debtor finance solutions have their own benefits, costs, usage, and effects on customer relationships.
Prepare Your Debtor Book: Maintaining a debtor book keeps a record of all outstanding debts or invoices. It holds accurate records, due dates, outstanding amounts, customer details and payment history. A well-maintained debtor book increases your chances of securing favourable financing terms.
Engage with Financial Institutions: Lastly, businesses need to select reliable financial institutions for debtor financing. Consider client reviews, terms and conditions, and the institution’s track record. Compare different providers and negotiate terms to secure the best deal for your business needs.
Benefits and Risks Associated with Debtor Finance
Debtor finance helps businesses by providing quick access to cash and flexibility. However, it also has risks that need careful consideration. Knowing the pros and cons will help you make better financial decisions. Here are the key benefits of this financing:
- Improved Cash Flow: Debtor finance provides immediate access to funds tied up in unpaid invoices, helping businesses meet operational expenses and invest in growth opportunities without waiting for customer payments.
Flexibility and Scalability: The financing amount can grow alongside your sales, allowing businesses to access more funds as they expand, making it a flexible solution for varying cash flow needs.
Reduced Bad Debt Risk: By partnering with a finance provider, businesses can share the risk of unpaid debts, as these providers often have systems in place to manage collections effectively.
Supports Growth and Expansion: With improved liquidity, businesses can invest in new projects or expand operations without the constraints of slow-paying customers.
With benefits, hiring a debtor finance broker comes with its own set of risks as well. Some of the main risks are:
- Cost Considerations: Fees associated with debtor finance can be higher than traditional financing options, potentially impacting overall profitability if not managed carefully.
Dependency on Customer Payments: The effectiveness of debtor financing relies heavily on customers paying their invoices on time; delays can affect cash flow and financial stability.
Impact on Customer Relationships: Transferring invoice management to a third party may lead to strained relationships with customers if not handled sensitively, as they might prefer direct communication with your business.
Choosing the Right Debtor Financer for Your Business Needs!
At MC Finance Group, we understand the challenges that businesses face in managing their cash flow. Hence, we ensure to provide unique and tailored solutions for your financial needs. If you are looking for funding options like debtor finance in Melbourne, we are just a call away. Contact us on 0430 200 322 or email us at Matthew.chik@mcfinancegroup.com.au, and our team will assist you.
