Debtor finance is a specific type of lending that allows businesses to borrow money against amounts owed by customers known as its accounts receivable. For many business owners, debtor financing offers access to the cash owed to them without the need to take on debt.
What is Debtor Finance?
When some businesses sell their goods or services to customers, they may decide to set their payment terms for 30 days or more. However, there are some customers that may not to pay the outstanding amounts they owe for 60 or even 90 days or more.
In this scenario the customer doesn’t pay for the goods purchased right away. Yet the business still needs to pay suppliers as well as cover operating costs, rent, wages and other expenses. When a business has tens of thousands of dollars in unpaid invoices outstanding, the risk of experiencing cash flow problems due to a lack of working capital increases.
Some business owners may choose to apply for a business overdraft or an unsecured loan to buffer against cash flow problems. These can be expensive options and involve going into debt in order to cover cash that is already owed by slow-paying customers
Alternatively, businesses may choose to use debtor finance, or invoice financing, to unlock the money owed to them from unpaid accounts receivable right away. The business sells unpaid invoices from accounts receivable to a debtor financing company to access the working capital they need.
Related: Factoring or Term Loan—Which is Best for Your Business?
How Does Debtor Finance Work?
When a business needs to unlock cash flow, it may be possible to sell unpaid invoices to a third-party lender who advances funds against the value of those invoices.
The business sends invoice details to the debtor finance lender to verify the amount owing and the date the invoice was issued. The lender issues a percentage of the invoice amount back to the business, often within 24 hours of approval.
Related: 10 Practical Tips to Boost Cash Flow in Your Business
How Much Does Debtor Finance Cost?
In most cases, debtor finance lenders don’t charge interest on the money you borrow. Instead, the lender agrees to pay the business a percentage of the invoice value funded. The percentage amount paid is known as the discount fee.
As an example, the lender might advance up to 80-95% of the invoice values to the business. Then the lender will follow up with the customer to collect payments owed. The actual discount fee charged varies, depending on the debtors being funded and the value of the business. Universal Funding rates start as low as 0.55%.
As there are no interest charges or other costs associated with setting up other types of finance, invoice financing can often be more cost effective than taking out an overdraft or an unsecured business loan.
Related: How to Calculate if Invoice Factoring Will be Cost-Effective for Your Business
What Collateral Security Is Needed?
Most invoice financing lenders don’t ask to take security over your family home or business premises as collateral. Instead, the lender uses the business’s accounts receivable ledger as collateral.
Improve Your Company’s Cash Flow
Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.