Everything You Need to Know About Debtor Finance

Debtor finance is a financing tool wherein your business gets a loan against your outstanding receivables. This helps release much needed working capital and facilitates smooth operation of your business. It can get you loans as quick as 24-48 hours. Usually the loan amount ranges between 70% -90% of the total value of the debtor’s ledger. The financer releases the balance amount when your receivables are actually realized.

Why Debtor finance

Businesses are almost always done on credit and at times the payment realization takes as long as 60-90 days. Such credit terms compromise the working capital and affect the cash flow, ultimately affecting business operations. Debtor finance can come to the rescue in such situations and help you free up your working capital and keep your expansion plans in line. The good part about debtor finance is that real estate security is not needed like in conventional financing.

Different Types

Debtor finance can broadly be classified into the following categories:

Confidential: In this case, the business finances are not notified to your customers. They do not know about the deal happening between the lending company and your business and they make their outstanding payments to your company only. Disclosed: in this case a notification is sent to your customer clarifying that you have lent out the debtor’s ledger and your customers make their outstanding payments to the financier.

Different Terms

The typical time line is 90 days. Also financers do not usually accept invoices that are more than 90 days old. If the customer does not pay within 90 days, the financer usually recourses such invoice, which means the credit liability again shifts back to your company after 90 days. At times non-recourse debtor finance is also available wherein the financer assumes part of the credit risk or extra recourse periods are offered (typically 120 days) for realization of the outstanding receivables. Though no real estate security is required, to utilise this type of finance, you may have to offer collateral of certain specific assets and personal guarantee of the business directors, along with your debtor’s ledger.

Who Can Get it?

There are no specific sectors per se, but usually businesses that sell goods or services to businesses are more eligible and are mostly the ones that use this type of facility. It is important however that your business has a financially strong customer base since debtor finance is less dependent on the creditworthiness of your own business and more dependent on that of your customers. It is also important that you have a long term and robust relationship with your customers for you to be eligible for debtor finance.

Choosing Between Debt Financing or Equity Financing

Finance managers world over are faced with the choice between debt financing and equity financing when looking for finance for their businesses. Both the types have certain merits and demerits. A little demystification will perhaps help towards the decision making process.

Debt financing the pro’s and cons

Debt financing is basically when you take loans from financial institutions, banks or government agencies which need to be repaid over a fixed time period. Debt financing has certain advantages and disadvantages, which are listed below.

The positives

The lending institution or bank has no say in the internal decision making of the business and has no ownership in the business. There is a tax advantage since the interest on the loan is tax deductible and you can usually plan and incorporate the repayment in your budget since both principal amount and interest rate are known.

Disadvantages:

Loan repayments may be used for working capital and cause cash inflow issues ultimately affecting growth.

  • Flexibility with regard to repayment time is mostly non-existent.
  • Too much of debt may cause your business to be identified as high risk entity and hence negatively affecting prospects of raising additional capital in the future.
  • Your business may become vulnerable if your cash flow is affected owing to several reasons, such as drop in sales. This is especially true for new businesses
  • You may have to provide assets of the business as security or collateral.

Equity financing

Equity financing is when an investor finances your business in exchange for ownership of shares or stakes in the business. The investing entity reclaims the investment from future profits. The advantages and disadvantages of equity financing are as follows:

The positives

  • You don’t have to repay the money and hence it is less risky than a loan.
  • You can access the investor’s network, adding more credibility to your business.
  • Your working capital is not affected due to loan repayment compulsions and business growth gets a boost.
  • In case the business fails, you don’t have to repay the investment.

Disadvantages

  • Loss of autonomy since the investor has certain control over the functioning of your business and also shares your profit.
  • You will have to consult the investor while taking decision, which may result in disagreements and friction
  • At times the returns taken by the investor may outstrip interest rates payable on loans.
  • Finding an appropriate investor is both time and resource consuming.

The Final Call

Both forms are essential financing tools for a business and the decision as to which tool to make use of depends on the long-term business goals and the amount of autonomy or control that you wish to retain over your business. Ideally a business needs to use both the tools according to specific situation and needs. It is usually argued that new business may be in a better position if it goes for equity financing and then gradually also includes debt financing to its portfolio. As per experts, an ideal debt-to-equity ratio for a business should be between1:1 to 1:2.

Guaranteed Auto Financing – Fact or Fiction?

In today’s challenging economy, rising unemployment has meant that many people have found themselves unable to meet their family’s financial needs. Unemployment and inadequate cash flow can damage anybody’s credit reputation. With a bad credit history, your reputation in the financial marketplace becomes questionable, especially when it comes to finding a car loan. However, enter ‘guaranteed’ auto financing to the rescue of those who face these types of financial challenges. Many reputable financial institutions now appreciate that many people are struggling to make ends meet and so have responded by offering different guaranteed auto financing packages to suit various personal situations.

These days it is not necessary to have a perfect credit rating to get a loan and so most people can access car loans even with a bad credit history and irrespective to the size of their income. Of course, guaranteed auto financing is never actually 100% guaranteed. However, several lending institutions now offer bad credit auto loans and with careful research, it’s easy to learn how to improve your likelihood of acceptance.

There is stiff competition amongst lenders in the car financing market. Every dealer tries to please their customers in order to achieve more deals. There are lenders who are specialists in handling particular kinds of credit situations and these lenders can assist you get a loan with sensible terms. Bear in mind that a few dealers might reject your application. However, most lenders will be well informed enough to be able to help you get the loan. Therefore, spend some time researching online to find lenders who are will be able to finance your present economic condition.

Preparing Your Guaranteed Auto Financing Application
Knowing how to approach auto financing lenders is important. Do not give a lot of dealers accesses to your credit history because the more people that inquire into your credit, the worse it looks to the one giving you loan (they are able to see how many times your credit record has been accessed). For that reason you may want to obtain your own copy of your credit report. By understanding this report you should be able to match it to the type of auto financing lender you are considering.

Try not to let every other person know about your credit details. Only talk about it with people who you trust and who are willing to guide you. When you are meeting a lender to arrange guaranteed auto financing, make sure that the person that accesses your credit report is actually the dealer who is selling you the car of your choice. Otherwise allowing to many parties access to your report might end up hurting your credit record.

Repairing Credit History via Auto Loan Repayments
Like any loan, guaranteed auto financing depends upon being able to pay the installments consistently on a weekly or monthly basis. If you are able to demonstrate that you can repay a loan without missing a payment, then your credit rating will improve. However, note that guaranteed auto financing lenders sometimes tend NOT to report your credit to the credit bureaus, so it can be hard to build up a good reputation using this type of loan. It is also worth noting that the loan term for guaranteed auto financing is often short and is typically for purchasing a used car.

Do your research and think carefully before approaching a guaranteed auto financing company. Know that there are ways to obtain car financing if you have a bad credit rating using guaranteed loans – but tread carefully. Finally do not forget that you can trade-in a used car and this can help you to negotiate a lower interest rates.

The Ins And Outs Of Invoice Finance

When businesses are considering their finance options, there is a tendency to concentrate on the popular products which may not always be the best solution. What would you consider for your company? Overdraft? Company Credit Card? Loan? Invoice Finance? I would expect that the last of these would be at the bottom of any list, if it was even on it to begin with. Invoice finance is a tried and tested option and, as such, it is surprising that so many businesses overlook it.

It’s difficult to find a time where finance isn’t being talked about in the press, on TV or on the radio. But would you know what invoice finance was if you heard it being talked about in any of these media? If not, you may find the following brief guide to the whats, ifs and buts of invoice finance helps demystify this form of business finance.

Invoice finance, more specifically known as invoice discounting or factoring, is an alternative finance product which often gets its fair share of bad press in the market. This seemingly helpful cash flow product still carries the stigma of being a last chance saloon for a company on the brink of their demise, but is this really a true reflection? No, is the answer.

Invoice finance can often be the product of choice for many companies from small start-up firms to established multi-national companies, although in general it is medium to large companies that gain most benefit. In simple terms, invoice financing allows a business to receive a large percentage, typically 80-85% of the money owed to them within 24 hours of submitting an invoice. The invoice financing company then remits a further percentage of the invoice, typically 10-15%, after the invoice has been settled.

The benefits which this product brings are vast:

Cash Flow
The first and most obvious benefit is access to cash. The flood gates of opportunity can well and truly open with enhanced business cash flow. Many companies use increased financial liquidity to pay suppliers early, buy stock at an attractive price and bridge the gap between completed work and the date of their invoice payment.

Credit Insight
All companies providing their clients with invoice finance also give access to invaluable information about the clients’ customers, allowing them to make informed decisions about levels of trade and credit.

Bad Debt Protection
Many invoice financiers offer bad debt protection, which offers the client financial protection against any of their customers going bust.

Credit Control
This benefit comes only when you operate a factoring facility which gives you the opportunity to allow your factor to carry out collections on your behalf. This frees up much needed time and would usually be at as little as half the cost of employing a credit controller.

The next time you are thinking about your business’ financial position, it’s as well to consider all the options rather than just plumping for the most obvious solution. Why not explore all of the options including invoice finance? Even take it a step further and think outside the box by considering new and innovative alternative finance options such as crowd funding, peer to peer lending or even timesheet finance.