A kind of financing tool, debtor finance is a quick fix solution for all your working capital needs for a short term. Though not many financial experts advise against resorting to debtor finance, it is quite handy when you need quick funds.
It is an arrangement wherein a business accesses loans against the debtor’s ledger as security. In one word, it is a loan that the business gets against the outstanding receivables. Typically, the financing institution will advance around 80% of the valuation of the debtor’s ledger as a loan within 24-48 hours. The remaining 20% is released when the receivables are actually realized from customers.
Who should access debtor finance and when? Businesses that stand to gain the most from debtor finance are those who have longish gestation periods for credit realization. Usually businesses that have credit terms in the range of 60-90 days are good cases for debtor finance, since it helps them carry on with business as usual without straining the working capital even though the credit term is substantial. Debtor finance is also handy when your business either has low fixed assets or cannot afford to provide the existing fixed assets or real estate as security. Additionally at times when your business is already in debt and is not in a position to explore further finance via conventional avenues, debtor finance can come to your rescue, that too, without compromising your fixed assets or real estate.
Prerequisites To Obtaining Debtor Finance
You business must be strong in terms of customer relationship and trust. The finance institution may want to look into the robustness of the relationship that you share with your debtors or customers before approving finance. Additionally, for debtor finance to be effective, your credit term should be more than 45 days, since anything below that will mean unnecessary and extra interest liabilities that may bog down your business.
Benefits Of Debtor Finance
• Debtor finance meets your immediate working capital needs, without compromising business or personal assets.
• With debtor finance you can do cash purchase and get higher discounts.
• Business processes become more regularized and customer relationship is enhanced since these are prerequisites.
• Debtor finance ensures that your business can capitalize on all opportunities without straining the cash flows.
Provided you diligently weigh the merits and demerits of the high interest costs vis-à-vis your business situation, you can take advantage of the unique financial product that debtor finance is, without the pangs of real estate security.