Debt financing has gained popularity to finance most growing businesses. It enables investors to pay for the organizational expenses by using slow-paying invoices. It offers a flexible credit line which depends on outstanding invoices and may be significantly beneficial for small and large businesses. Debt financing refers to products or items that fund a particular company or organization by financing its invoices. It’s also known as cash flow finance services. There are two basic types of debt financing: Invoice Factoring and Invoice Discounting. Both tackle the same issues and give similar advantages as well. Be that as it may, they are used in a different way and provide diverse features.
How Debtor Finance Works
1. Product or service delivery to a customer
This process starts when you make a certain sale to your client and they receive the goods. Thereafter, an invoice is generated which can then be assigned to a debtor finance company.
2. Invoice sending to both the client and financier
As you send out the invoice to your client, ensure you also generate a copy to send to the debtor finance company so that it can initiate the next move or step.
3. Advance sending by the debtor finance company
Once you receive and verify the invoice details sent, the company or financier advances up to around 80 % of its value inside 24 hours after which you receive the cash into your account.
4. Your business accesses the cash
You can use the cash the way you want after receiving it.
5. Your business receives the invoice reminder
Once the financier receives the payment from your clients, they will send the remaining 20% of the invoice value less a small fee to you. Most debtor finance companies offer online access to reporting, allowing the business to track installment receipts.
Types of cash flow finance services
Invoice factoring (disclosed)
In this type, the client or debtor is informed on invoices that the funds are payable to the debtor finance company. It’s mostly used by small companies that have cash flow problems. It offers 3 services: funding, credit advice, and collection assistance. It works by financing invoices separately or individually, usually in 2 installments. The 1st installment covers around 80 – 85% of the invoice’s total value which is deposited to your account after processing. The 2nd installment around 20% (less little charge) is deposited after your clients pay the full invoice.
Invoice discounting (confidential)
In this type, the client or debtor isn’t aware of the funding process. It’s mostly used by large companies that have well-established credit as well as collection procedures. It provides funding only: credit and collection are carried out by the customer rather than the debtor finance company. The involved amount decreases as clients pay your invoices and increases as you generate new invoices. Customers can finance invoices as batches and not individually. Most invoices are financed up to around 80% based on their credit quality. Besides, the actual percentage can vary based on customer needs and underwriting criteria.
Choosing a Factoring Company
Immediate business cash flow needs
Consider a company that offers industry-specific factoring
As an entrepreneur, you need to understand that factoring is not a single size fits in all concepts. There exist different types of factoring
Choose a flexible factoring company
Before making a deal with a particular company, it’s wise to ensure that the company you intend to choose is flexible. For entrepreneurs whose business is new to factoring, they need to consider a company that is flexible to sign a short-term deal with them to fast assess their progress.
Get to know the company’s terms and rates
Different factoring companies have different terms and also fee structures. You will approach different companies claiming to offer fair rates, but then, don’t run into any of it. You need to do prior research and have a list of companies from which you will compare their rates basing your analysis on the type of services they are offering. There are others with hidden fees; you need to find out all this before you set to sign a deal with any company. You need to keep a clear watch on companies that will get you through additional fees like for instance appliance or background check fees.
Get to know how long the company has operated
The amount of time a particular company has been operating is important when it comes to choosing the right factoring company for your business. Time spent and also experience in a particular field is much important. A company with a better understanding in this industry is what you need to consider as they will be standing at a point of offering smartest and more complex funding deals. The right and best company is the one that has a strong balance sheet and also known to be direct funders in this business. A company that is able to provide huge funding packages at the best rates possible and helps in lowering the overall risks that are involved while busy making improvements to your business towards success.
How Factoring Can Improve your Business Cash Flow
Factoring can be very beneficial to your business regardless of whether your business is big or small. This is because you will be able to get quick cash instead of having to wait for the people who owe you to pay their debts. You will sell your invoices to a factoring company and after a short time, you will be able to get the cash agreed. It is at times considered to be an expensive way of getting quick cash because the cash you get will most likely be highly discounted. But it is an effective invoice financing method that can significantly improve the cash flow of your business.
The main reason why factoring will improve your business cash flow is that you will get the money to pay the bills that cannot wait. Even though extending credit is an ideal way of enhancing sales, sometimes it can tie down the cash that your business needs. Bills such as paying your employee or getting new stock will need immediate cash and factoring can provide the cash to deal with such issues. When you get a good factoring company you will negotiate the amount you will get for the invoices that you sell to the company. It can even take just twenty-four hours to receive the cash if you have been using the particular factoring company. But if you are selling the invoices for the first time it will take a few days as the factoring company verifies the details of the people who owe you money. Factoring will let your business get the necessary cash needed to keep all the operations running smoothly.
Through factoring, you will also get to avoid the issue of having to borrow and incur debts. This means that you will not owe cash to financial institutions and this significantly improves the cash flow of your business. When you do not have debts you are assured that the cash you get will go to financing your business. The main reason behind this is that this method of invoice financing enables you to sell the invoices which are assets instead of getting loans which are liabilities.
As a business owner, you will also not incur the cost of collecting the various debts. When you sell the invoices to a factoring company the company is the one responsible for collecting the debts including paying all the expenses of collecting the debts. This helps in improving your cash flow because you are assured that you will not be paying to collect the debts. Therefore, through this invoice financing method is known as factoring you can significantly improve your business cash flow.
Factoring your Invoices Here are 3 benefits
Invoice finance sometimes called debtor finance or just factoring,is a huge boon to small and medium sized businesses. They allow the business owner to leverage the assets of the firm in a productive way through receivable finance. In this way using the invoices of the business, the owner can gain access to small business working capital without much hassle and in time to meet the necessary expenses. For business owners who are not familiar with factoring, the immediate advantages may not be very apparent. In effect, there are three main advantages to when you opt for this kind of debtor finance.
Business Working Capital for Growing Businesses
- Cash availability: For a small or medium business that has to keep pace with competitors who are bigger and better established the key concern is liquidity. Often, bigger businesses or those that have been in the niche longer have capital reserves that allow them to adapt to market changes quickly or to increase inventory or production at short notice. With the lack of much capital hampering it, small businesses often fail to remain competitive in the marketplace. By taking advantage of invoice factoring, these businesses can bridge the gap.
- Outsourcing collection: Another important yet time and resource consuming task that often erodes a small business’ ability to stay agile in the marketplace is invoice collection This is often a very complex and long drawn process that needs the investment of much manpower. A small business may lack the ability to dedicate human resources to invoice collection but this impairs its ability to ensure that debtors pay on time. The small business cannot afford to allow invoices to remain unpaid because this impacts its working capital availability. This problem is addressed by factoring too because the factoring agent takes on the task of invoice collection. In effect, the small business owner outsources invoice collection to the factoring agent.
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Invoice Factoring for Business Growth
Debt avoidance: What is the option open to small businesses if they need cash to meet an emergency expense or if they lack funds to match their expansion plans or production increases? They have to look for lenders willing to make a loan to them. If the business is a new one, this may prove to a tough task. The loan, even if available, may be a very expensive one that results in a huge drain on the business’ finances on a recurring basis. With invoice factoring, this debt burden can be avoided completely because the asset being used is the business’ own invoice and cash is advanced against this asset so no repayment is required.
How Does Invoice Finance Help Your Business
Is this Your Business?
In any business where selling of goods and services is involved, an invoice is generated. The invoice usually contains the contact information of the vendor and the customers. Invoices also have detailed information of the entities being billed. A unique number is assigned to each invoice for easy tracking and record keeping. This works as the proof of the account receivables which the customer has to pay.
If the items have been sold on credit terms, then it often takes 60 or even days for the payment to be made. Businesses that sell on these terms turn to invoice financing, sometimes called debtor finance or invoice factoring to maintain a steady cash flow.
Business Working Capital for Growing Businesses
Invoice factoring can deliver funding against sales invoices meaning the business owner can get funds advanced from the factoring company against their unpaid sales invoices.
In other words, invoice discounting is the process by which a company can get funds advanced to them from a Factor based on their unpaid account receivables.
Is Invoice Factoring Finance hard to get?
Invoice financing can be accessed by the company (or seller) which is entitled to collect payments from its customers. However, the amount borrowed or advanced and the discount for fees for the factoring services varies with different factoring company.
Factoring loans or advances are generally easy to get and usually are much less cumbersome difficult for the business owner.
The account receivables funding companies can assist in the collection of payments from the customers and this lets the business owner concentrate on running and managing his business which is a better use of their time.
Other Advantages
Business Cash Flow Solutions for Business Growth
Another advantage of invoice discounting or receivables finance is the release of the cash which is locked up in the debtor’s ledger and not able to be used in the business until the customer pays the invoice.
Business owners should use factoring companies which have reasonable invoice factoring rates but also ones that understand them and their business and are keen to help their business grow.
What business are suited to Factoring Finance
Factoring and debtor finance is best suited for small and medium sized business owners who are looking for a working capital to expand their business.
With the help of account receivable financing, usually up to 80% of the invoice amount can be received within 24 hours.
Factoring or Debtor Finance – a Cashflow Solution for Business
Factoring is a term used for a financial product where funding is provided against accounts receivables, that is the unpaid sales invoice of a business and typically a small to medium business or SME.
This is a very efficient means to keep the cash flowing in any business that sells on credit terms.
The three parties that are involved in a factoring transaction are: –
the Owner of the business who sells or assigns the rights to their account receivables in exchange for prompt funding,
the Factor who provides the funding to the business owner (that is the Client of the Factor) and of course;
the Customer or debtor who is in fact the customer of the business owner and will be responsible to pay the debt (that is the sales invoices) to the factor.
The amount paid by the debtor Is the full amount of the invoice however the initial advance to the business owner is usually an agreed amount that can be up to 80% of the invoice amount.
The account receivables, that is the invoice or a batch of the invoices must be for work already completed or for goods that are already sold and delivered. As the work is completed or the goods already delivered, the invoice/s are considered to be a financial asset of the business owners company which can be used as security to generate working capital instantly by using factoring.
This type of finance can sometimes be called debtor finance or invoice factoring.
Factoring Helps Business Grow and Expand
Factoring companies provide funding to the business owner based on a different fee structures that are generally unique to that factor and there is not general or across the board standard fee charged by all Factors.
Invoice Factoring or Debtor Finance is commonly used in businesses where the payment terms on their sales invoices are longer that the payment requirements of their suppliers.
For instance wages might need to be paid each week or every second week and rent every week or every month, but customers might only pay 30 days after the end of the month where the sale occurs. If the customer is a large business the payments terms as often even longer.
Factoring is better than the loan because it meets or matches the immediate working capital needs of the business and its obligations.
The selling of the account receivables shifts the legal ownership of the receivables to the Factor, so the Factor becomes the proper holder of the rights to the receivables.
The credibility and background check of the debtor is reviewed thoroughly by the Factor to ensure the reliability of getting the payment on time.
Growing businesses and owner of businesses where their sales terms are longer than their supplier terms should seriously consider invoice factoring or debtor finance to grow their business. 
Without a Factor Providing Invoice Finance to Support them this Construction Company was Out of Business
Background
A privately owned business that specialised in office and commercial fit-outs had been trading successfully for some years, and was already using debtor finance provided through another factoring company.
Their existing “factor” was unable to continue providing finance to the company due to a change in their own internal circumstances. They referred their client to Nova Business Finance.
Solution
Nova received the application and within 24 Hours was able to offer the new client a factoring facility that provided finance against the unpaid sales invoices.
The facility was relatively comparable to what they had enjoyed with their previous factor, however because Nova Business Finance has a more flexible approach to funding SMEs, it was able to provide a suitable solution for financing the new clients invoices.
Result
The facility was able to be settled within 48 hours of receiving all the completed paperwork back from the new client. The previous financier was paid in full and was happy to see his former client looked after properly and professionally.
The debtor finance facility provided to the new client enables the client to take on new and larger jobs with confidence, knowing that by using their invoices as security for funding for their SME, they will be able to fund their expansion as they grow.
Without some form of receivables finance the clients business would have been unable to grow.