Today’s companies operate in a very dynamic and complex environment. Add to that the circumstances brought about by the pandemic and you will understand how much uncertainty all participants in the economic business face. That uncertainty also applies to debtors. Unsuccessful collection of receivables or its prolongation are the main reasons for obstructing cash flow. Statistics show that almost one-third of companies go bankrupt in the first year of establishment precisely because of such problems. If you are an entrepreneur or want to become one, it would be good to consider the debtor finance option and its advantages and disadvantages because it is a financial instrument that can make a big difference in your business.
How does it work?
To make it easier for the company to sell its goods or services, the company usually leaves a period from 30 to 60 days for debt collection. In the meantime, the company must settle the received debt, procurement of raw materials, production process, workers’ salaries, and other costs. However, until the company collects the receivables from the debtor, it cannot reinvest the profit and that will stop the flow of its funds. Therefore, the company is not only in danger of profitability drops but also of jeopardy to liquidity. To break that chain, entrepreneurs can use different forms of business financing such as debtor finance. With debtor finance, in a brief time (usually up to 24 hours) you can get an advance on unpaid invoices to your account. The debtor finance company will pay you from a part of the debt claim.
In what situations is it used?
Using debtor finance is especially suitable for small companies operating with limited capital. Also, some companies often have a gap between investing in production and making profits. Apart from providing liquidity, a company can gain a competitive advantage by efficiently managing its sources of financing by securing cash flow and providing customers with the option of delayed collection.
Finance dept or loan
Finance debtors and the services provided by banks differ in flexibility. With a finance debtor, you will get the funds faster and easier. In addition, the amount of funds available to you varies depending on the needs of your company. For example, when your sales grow, you will get more money and vice versa. One of the essential differences is as a guarantee for the collection of your debt. Namely, when you take a loan, it means that you will keep responsibility for the collection of receivables from your client. Therefore, when taking a loan, you usually must guarantee the payment of the invoice by mortgaging your property. In arrangements such as financial debt, the institution itself bears the risk of non-collection of receivables.
Confidential or disclosed financing arrangements
When you use financial dept services, your client will probably know about your situation because the financial institution will require him to collect the receivables. It is an established financial solution. However, if companies do not want the source of their financing to be public, there are also confidential solutions. In that situation, you will receive capital without disclosing the participation of the financial company.
What matters is your current position
The advantage of using the services of financial departments is the possibility of obtaining funds regardless of creditworthiness. With the finance department, the amount of money you can get depends on your solvency invoice, which makes it suitable for companies that do not qualify for traditional loan financing. It is also particularly attractive for new companies that do not have a history of successful business behind them. Using debtor finance will not decrease your creditworthiness, which can also help you in business. They base debtor financing on the value of outstanding invoices.
Price of using debtor finance
The price of debtor finance services depends on the value and time of the invoice fee you are looking for, the creditworthiness of your customer, the type of debt financing, and the overall risk assessment. The debtor financial company will check your solvency and credibility of your debtor before concluding the contract. One factor is also whether you use the debtor finance services continuously or only once. Companies engaged in production or service provision mainly use debtor finance. Or you can always find a credible hard money lender if you make a proper search first.
Use Debtor Finance Wisely
Before you decide to use services such as debtor finance, consider a couple of factors. One of them is the unique reason you need funding and the current situation in your company. Taking money before the receivables arrive can in no way be a substitute for efficient finance management. It must constantly adjust the maturity of your financing so that you do not end up when you use and pay for services that you do not have to.
Using funding from sources such as debt finance has increased. Its has contributed to the speed and simplicity of this type of financing and market instability. The investment must be in line with the long-term goals of your company. The option to use the money from the debtor’s claims promptly can sometimes make a significant difference in your business. It will give you control over the flow of money. You will regularly settle your obligations, which will increase your business image and reduce stress.