Finding the best possible funding method for a new company can be a very long and tedious process, but thankfully with the help of debtor finance you can ease the process and obtain much better results at all times. But how this type of financing does that and how does it differ from other similar ones?
What is Debtor Finance?
Simply put, debtor finance is a process through which a business can receive its funds, but in order to do that it provides its accounts receivable ledger as a collateral. Most of the time, those companies that have a very small capital reserve can get into trouble as their invoices need to be paid on the net 30 terms, something that’s not ok for them. With the help of debtor financing however, any company has the opportunity to find the funds that are needed in order to pay these invoices, and this manages to improve the overall cash flow, operate expenses and just deal with all the financial issues in a better fashion.
Because a multitude of businesses need to offer credit terms so that they are able to secure the orders that their customers are placing, they find themselves unable to have a steady cash flow, and because of that the growth of their business is greatly reduced, something that’s not good at all for any company. This is why accessing the debtor financing solutions can really help the company.
You can find many types of debtor financing solutions, such as invoice finance, asset finance, cashflow finance, invoice discounting, factoring and others, so there are multiple ways through which your company can receive the necessary financing even in those situations of dire need!
Most of the time the security requirements brought by debtor finance tend to vary, although most of the time these focus on the debtor ledger value that’s supported by a collateral. Sometimes, a mortgage over the business can also appear. Another important thing to know is that the debtor finance credit lines are set to increase exponentially based on their number of sales, and through this the company will receive the working capital that is necessary in order to fun the business. You will find the advance rates varying in rates, from around 70% and up to 90% of the whole receivable ledger value, The rest of this value is most of the time known as the retention and it’s released when the invoice payment has been released by the debtor/customer.
How debtor finance works?
The debtor finance process is very easy to understand. Simply put, the whole cycle consists out of 3 different players, which are your company, the bank and your customer. The first step is performed when your customer starts an order, and once you receive the order you will send the goods that the customer has asked for.
At the same time with those goods, you also send an invoice so you can receive your money for the products you sent to the customer. In addition to that, you also send a copy of the invoice to the bank as well.
Upon approval, you will receive the agreed amount of money from the financial institution, so you can have liquidities in your company, a necessary thing if you want your company to grow and become successful. Most of the time, the debtor finance company will provide you with 80% of the whole invoice value, and after a little while the customer will also pay the money directly to the financial institution. After the financial institution has receive the whole sum of money, you will receive the remaining 20%, which means that you will get the full amount of money you agreed upon!
Instead of having to wait a long period of time in order to get paid, with the help of debtor finance you can easily streamline the process and obtain most of those money immediately, with a little help from your bank/financial institution you chose to work with.
How to find better debtor finance company?
In order to get the best debtor finance company you will need to study the services they provide. One of the most important things here is to make sure that you receive as much cash as possible for your company. Of course, the debtor finance companies that bring you more than 80% of the whole cost are definitely the best ones you can choose.
Another thing you need to take a look at is their experience. A reputable company should have at least 4-5 years in this business, as this way you can be certain they have the necessary experience when it comes to managing your money and helping your business.
In addition to that, if the debtor finance company is specialized in a certain field of work, especially yours, then this is a much better solution.
Moreover, you will have to work with a debtor finance company that responds very fast. Reading reviews online or working with them on a trial run will provide you with a good idea when it comes to the capabilities of that company!
You will also need to see if they work with companies of your size. For example, there are debtor finance companies that work only with corporate clients, while others cater only to small businesses. See what they offer, and if they fit your needs.
Of course, pricing is also a crucial thing when it comes to determining the debtor finance company. The lower the costs, the better for your business! Of course, you should also try to see from where they get their finances, if they have a steady financing stream that can support your business and so on!
These are the most important things you need to know about debtor finance and the way you can find a debtor finance company. This guide should help you understand how important debtor finance is for any business and how crucial it actually is to work with a reputable and experienced debtor finance company, as this is the only sure way to achieve the desired success!
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