Debtor / Invoice Financing: A Great Solution for Working Capital
Having a great product, committed staff and plenty of eager customers often isn’t enough for a small business to grow.
Working capital is essential to grow but can be hard to maintain, especially if the owner’s assets are limited and he/she is unable to fund it personally. What if it were possible for a growing business to have its invoices paid within a few days of you issuing them to your clients?
This solution does exist and is known as debtor financing. Under this model, the bulk (up to 85%) of an invoice is paid almost immediately, not by the customer but by a financial institution.
How debtor finance works
You “sell” your invoices to the lender. The lender then advances you immediate funds of up to 85% of the invoice value. The lender will pay you the rest (less a small fee that goes to the lender for providing you with the upfront funds) when your client settles their invoice in 30 to 90 days time (as per your trading terms with them).
Debtor finance should not be confused with Factoring which is similar but costs the a business a lot more as the financer takes over the entire process of collections and deals directly with your debtors (its like outsourcing your back office receivables person/department). Factoring is not used much at all anymore as it was considered a dirty word back in the day and utilised by struggling (instead of growth) businesses.
Invoice discounting on the other hand provides full flexibility, does not interfere with your accounts receivables department and does not engage with your debtors directly. You retain 100% control of your invoices and your clients/debtors.
Financiers will typically lend you up to 85% of the face value of the current debtors’ book (invoices). The percentage does vary from financer to financer and is linked to the total size of the invoice book, the credit profile and risk of each debtor and the payment history, amongst other credit criteria observed.
Debtor financing, is something every growing business, whether cash flow positive or not, should investigate, especially those on a sharp growth trajectory needing working capital to fulfil purchase orders.
The Invoice Market (tim.) is a leading provider of invoice discounting. Using tim’s services allows you quick access to funding to help grow your business. Our invoice discounting services offer high advances at low discount rates with no upfront fees and optimal flexibility.
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