What is Debtor Finance?
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.
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.
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.
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.
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.
The Bottom Line
Insufficient capital ranks as one of the most common reasons businesses fail. It prevents businesses from purchasing the goods and services needed to maintain and expand their operations. Thankfully, you can raise capital for your business using debt financing, equity financing or other non-traditional lending options such as invoice factoring.
To learn more about how debtor finance could help improve your business cash flow, contact our specialists today at 800.405.6035 or complete our rate form. We’ll work with you to determine the best financing options available to support your business needs.
About Universal Funding
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have working capital in your hands in a matter of days.