In certain periods of the year, your company’s cash flow will inevitably be lower than usual. However, this is not a reason for concern if you know how to access the money locked up in customers’ invoices ahead of the payment. For companies that are looking to withdraw funds for uncollected invoices, debtor finance provides a convenient option to cut business risks and ensure a steady cash flow. So, how does debtor finance work and what are the gains behind it for your company?

Debtor Finance 101: What Debtor Finance Is

Entrepreneur calculating finances on notepad
Entrepreneur calculating finances on notepad

Most companies selling their goods and services allow a 30-90 day period for the collection of debt, but in some cases, the payment may be prolonged for various reasons. In such cases, vendor companies can use a few different business financing options and debtor finance is one of them. With debtor finance, the company can get an advance on outstanding claims to a certain sum of the invoice, usually up to 80%. The amount is automatically repaid upon debt collection, which facilitates cash flow and reduces business risk.

Lower Payment Guarantee Requirements

When withdrawing the funds, the ledger functions as the main loan security so that businesses do not need to use real estate or assets as a security. In this light, the service of a debtor finance company offers a practical alternative to conventional loans and the lender usually requires the company to provide an up-to-date view of the accounts receivable ledger. The withdrawn funds are repaid when the invoice is paid by the customer, thus bolstering liquidity and allowing smooth cash flow with limited company capital in the mix.

Finance Debt Advantages Over Classic Loan

Finance debt differs from a standard loan in terms of flexibility as finance debtors allow companies to draw funds faster and with greater ease, and the amount of funds depends on the needs of the company. Unlike classic bank loans, debt finance does not involve property as invoice payment guarantee. Instead, the company itself bears the risk of non-collection of receivables, which is why many small and medium-size businesses opt for debtor finance services over bank loans these days.

Two Main Debtor Finance Types Available

A magnifying glass examining money
A magnifying glass examining money

Within invoice discounting and factoring, there are two main types of debtor finance services which differ based on the type of invoices used to access the funds. Full ledger service is used in cases when the full accounts receivable ledger is used to access the funds, thus maximizing debt finance amount. On the other hand, partial ledger is used in situations when only one part of the accounts is used to withdraw funds. In some cases, debtor finance facilities function as a line of credit, with the available limit increasing when invoices are raised and dropping when the invoices are paid.

Main Benefits of Modern Debtor Finance

These days, debtor finance providers use integration to ensure automatic and real-time insight into invoices, which simplifies and accelerates the payment. On top of that, cloud accounting software is used to reconcile payments to invoices in a matter of clicks and stay on top of payment timing. Since the funds are immediately repaid upon debt collection, there are usually no ongoing charges or fees for using the services of the provider. On top of that, by avoiding borrowing more than you can repay, you can also slice the risks which commonly accompany use of classic bank loans. As for other debtor finance benefits, these include smooth cash flow, additional working capital, and freeing up staff, which makes debtor finance a better alternative to traditional bank loans.

Judging by its rising popularity and perks, debtor finance is here to stay and it is highly likely to become even more popular among small and medium-size companies in the years to come. Thanks to its convenience and security, debtor finance will help your brand ensure smooth and steady cash flow and simple debt repayment, and it is especially useful in periods when collection of debt seems to be running slow. For this reason, if you want to ensure your company is never short on cash, you might want to consider giving debtor finance providers a go in low payment periods.

Have any more tips about debtor finance? Let us know down in the comments.

This article originally published on GREY Journal.