In the business world, maintaining a cash flow is crucial for achieving growth and success. However, many small and medium-sized businesses often face challenges when it comes to collecting payments from their customers in a timely manner. This delay can restrict their cash flow, making it difficult to pay suppliers, manage payroll, and invest in expanding the business.
Thankfully, there are strategies that allow businesses to gain access to cash by converting outstanding invoices into working capital. One particular strategy that has gained popularity among business owners is known as invoice debtor finance.
What is Invoice Debtor Finance?
Invoice debtor finance, also referred to as invoice finance or accounts financing, is a solution that enables businesses to unlock the cash tied up in their unpaid invoices. Instead of waiting for weeks or even months for customers to make payments on these invoices, companies have the option to sell them at a discounted rate to a third-party funding provider, a specialised finance company, or an invoice financier.
How Does It Work?
The essential steps involved in invoice debtor finance are:
1. Application Process:
Businesses need to apply with their chosen funding provider in order to avail of invoice debtor finance services. This application usually involves providing information about the company’s financials, outstanding invoices, and customer details.
After reviewing the application and conducting research on both the business seeking financing and its customers’ creditworthiness, the funding provider makes a decision regarding the approval of the application.
3. Invoice Submission:
Once approved, the business has the option to submit the selected invoices against which it wishes to obtain funds. These invoices act as collateral for securing the funding.
4. Funding Advance:
Upon acceptance of the submitted invoices by the financier, a predetermined percentage (usually between 70 to 90%) of their value is advanced as working capital within 24 to 48 hours.
While the finance company takes ownership of those invoices, it is still up to the business to collect payments from their customers. Typically, customers are directed to make payments into a designated bank account controlled by the finance company.
6. Balance Payment:
Once all the customer payments have been received, the fees are deducted by the financier before advancing to the business what remains of the invoice value (minus any applicable charges).
Benefits of Invoice Debtor Finance
Some of the major benefits of invoice debtor finance include the following:
1. Improved Cash Flow:
Invoice debtor finance allows businesses to access cash flow by unlocking funds that are tied up in invoices. This additional cash can be utilised for day-to-day operations such as paying bills, employee salaries, and supporting growth initiatives.
Unlike loans or lines of credit, invoice debtor finance doesn’t require long-term commitments or fixed repayments. It allows businesses to access funds when needed without being tied to payment schedules.
3. Better Financial Control:
By utilising invoice debtor finance, businesses gain control over their well-being and stability. Instead of waiting for customers to make payments, they can proactively manage their cash flow and ensure timely payments to suppliers and vendors.
4. No Negative Impact on Customer Relationships:
Contrary to popular belief, using invoice financing doesn’t harm customer relationships or suggest that a business is facing financial difficulties. The financing process remains confidential between the business and the financier, avoiding any strain on customer connections.
For small and medium-sized businesses looking to improve their cash flow while balancing account payables and receivables, invoice debtor finance is an increasingly viable solution. By utilising this strategy, companies can effectively manage their working capital by easily accessing the funds needed instead of waiting for extended payment terms. With the increasing number of providers in this field who offer payment solutions, it has become crucial for businesses to consider the advantages of invoice debtor financing as a part of their overall strategy for optimising cash flow.