You may be offering longer terms in order to keep your clients happy, or perhaps you’re servicing a larger client and they have standard terms. In either scenario, it can squeeze your ability to run your business efficiently and can impact your ability to grow.
At this point, you might be wondering:
- Will there be enough money for wages and rent?
- Should you still plan the marketing activity for the upcoming quarter?
- Should you still recruit new business units, such as design?
It can be a balancing act. Although longer payment terms aren’t ideal, your business needs customers in order to grow and you don’t want to risk losing your best clients.
One way to address your cash flow concerns is to explore debtor financing options; it’s available to businesses of all sizes.
What is Debtor Finance?
Debtor finance is a way for businesses to improve cash flow by using accounts receivable (or incoming sales invoices) as collateral (i.e. security) for the loan.
What this means in practice, is that if you have a book of invoices that is owing to you, then you could use the invoices as security to get funding. Think of debtor finance as an IOU to a lender based on your clients’ IOUs to you.
Break it down for me
Debtor finance is split into two areas:
- Invoice factoring
- Invoice discounting
Invoice factoring is where you enter into an agreement with the lender and they take active control of your outstanding invoices and even chase customers for payment. This may not be ideal if you want to maintain control of your customer relationships.
Business owners are typically offered invoice factoring by a lender in order to ensure the quickest settlement of the outstanding accounts receivable ledger. This puts the lender in the driver’s seat and they can chase the customer for the cash. This approach can be positive for time-poor business owners who want to limit the time spent chasing down invoice payments and spend more energy on core business activities.
Invoice financing is where the lender provides a cash facility in order to bridge the business’ credit needs. Customers will be unaware of the debtor finance relationship with the lender because you maintain the responsibility of chasing the customer for invoice payments. This might be the preferred option if you don’t mind spending the time chasing invoices because you see it as part of the overall customer experience.
You may not always get a choice between invoice factoring and invoice discounting. Some lenders will only offer invoice discounting to larger, higher volume businesses with a strong client base.
How can debtor finance help my business?
Debtor finance is a welcome relief for businesses that are reliant on customers paying their invoices on time. The lender only takes collateral over your accounts receivable, allowing you early access to money that you’ve been promised by your customers. This unlocks more capital for the everyday running of your business.
Another positive is that debtor finance allows more organisations access to finance, even if they don’t have traditional collateral such as property, equipment or vehicles. Debtor finance does attract a fee from the lender, where you pay interest for early access to the capital, and the rates are dependent on the business’ qualification and risk criteria.
If you want to explore your loan options, the Valiant in-house team of credit specialists can guide you through the process. With over 60 lenders across a range of products, Valiant maximises the business owner’s finance solutions while streamlining the process of applying.
Jacob is the Director of Sales here at Valiant. He has a wealth of experience in helping small business owners with their everyday finance needs, and is our go-to guru for all things working capital.