If you’re a business that offers terms to other businesses and you’re growing, then inevitably you will experience a situation where your debtors have grown to a level that you suddenly have a cash flow problem unless you’re very well capitalised.
How can this be? Your accounts are showing great profits, however, you never seem to have enough cash to pay your accounts when they are due. It’s the problem that all growth businesses have regardless of how well they’re managed. This is where Factoring/Debtor financing can assist.
You approach the bank for assistance and they indicate that they’re unable to assist you as you no longer have enough equity in your property to cover the loan or you haven’t been in business long enough to satisfy their requirements.
This is where Factoring or as it’s also known, Debtor Financing or Invoice discounting, comes into the picture. Factoring allows you to obtain up to 80% of the value of your outstanding invoice within 24 hours of issuing that invoice. The remaining 20%, less a small fee is paid to you when the invoice is paid in full.
By Factoring your debts, you free up your Capital to meet your daily operating expenses and continue to grow your business. It’s a credit facility that has no limits and which allows you to continue to grow your business without any shackles.
What’s the difference between Factoring, Debtor Financing and Invoice Discounting?
We get asked this question a lot as it confuses many business owners. Basically, they’re all the same thing in that they are a form of financing where you use your debtors as security to obtain funding. The main difference arises in who controls the accounts receivable collection process.
Factoring and Debtor Financing is the same thing and to keep it simple, we’ll use the term Debtor Financing. With Debtor Financing, the lender will control the collection of the outstanding accounts and then remit the balance, less fees, directly back to you.
As you may have guessed, with Invoice Discounting, you will be responsible for chasing the accounts and then remitting the original advanced amount, plus fee’s, back to the lender.
What will Debtor Financing and Invoice Discounting cost me?
This is a difficult question to answer as the fees associated with this type of financing are determined based on a number of factors. For instance, Debtor Financing will have a higher cost than Invoice Discounting due to the fact that the lender will be handling the accounts collection process. Other factors that will also impact the pricing are such things as whether the facility is recourse or non recourse, the strength of your business, the number of debtors that you have and the % exposure to certain debtors.
Each facility will be charged a % fee on the funds outstanding as well as a management fee and perhaps an administration fee. The management and administration fee will be based on the size of your debtor’s ledger as well as the estimated turnover for a 12 month period.
All of the above are negotiable. It may benefit you to pay a higher %fee for a smaller management or administration fee. We will work out the best structure for you.
A Tiered pricing system
Within this market there are a number of lenders that all tend to focus on a certain market segments. The market is segmented based on risk profiles and the lender’s then price accordingly based on their assessment. Some lenders have different brands for different segments. We understand these profiles and we know where you should be correctly placed. Often lenders will attempt to place you in their higher risk brand so as to obtain a better margin.
Can I choose between Debtor Financing and Invoice Discounting?
Invoice Discounting is usually only available for larger more established businesses that have an established history and an established accounting department that are experienced at collecting accounts in a growing business. The majority of businesses will use a Debtor Financing facility.
Do the Banks provide Debtor Financing or Invoice Discounting?
Some of the banks do provide Invoice Discounting and they tend to only lend to the larger, more established businesses. Quite often they also require mortgage security and in return their charges tend to be the lowest in the market. Banks tend not to provide Debtor Financing facilities as they don’t have the back office systems to handle the accounts collection process.
Will my clients know that I’m using Debtor Financing?
In most cases your clients will be made aware of this by the fact that they will have to direct their payments to the lender. On some occasions a confidential service may be provided. Many of your clients will already be paying other accounts from their suppliers directly to lenders as well. You shouldn’t be too concerned about this as it won’t impact your client and is probably the reason as to why you were able to increase their credit limit.
How will Debtor Financing and Invoice Discounting help my business?
– Improve your cash flow allowing you to take advantage of discounts offered by your suppliers
– It can help you avoid penalties associated with late payments
– It will allow your business to grow in a much quicker manner which in turn results in a more profitable and valuable business.
– It will allow you to increase the amount of credit that you can advance to your better clients.
– It allows you to take on more clients
– Debtor financing can allow you to outsource the collections and accounts management process to an experienced collection team, saving you ongoing costs and freeing up staff and resources to focus on more profitable activities.
– Avoids the requirement of raising Capital to help fund the growth of your business which is more expensive than the cost of the finance.
– It’s a source of debt that is available to start up businesses when quite often other lenders will not assist.
How can Capital Funding Group assist you with your Debtor Finance or Invoice Discounting requirements?
There are a number of ways that we can assist you if you would like to consider using this form of financing in your business or whether you’re currently using this type of finance.
– We have relationships with a number of different lenders who specialise in this form of financing, which means that we have can save you valuable time and ensure that you obtain the most competitive terms and the most suitable facility for your requirements.
– Our experience allows us to quickly analyse your business and your requirements and quickly place it with the most appropriate lender or send it out to the most appropriate lenders to tender for your business. We love competition as it results in a better outcome for you.
– We know what you should be paying in the market and we ensure that you pay that and not a cent more. We’ve saved clients substantial sums of money by having their current facilities repriced by their lenders or adjusted to more fairly
– Quite often there are a number of costs or charges that aren’t initially obvious. We know how the various lenders construct their contracts and we not what to look out for, potentially saving you substantial amounts of money.
– We will educate on how to use the system to maximise your profits.
If you would like to know more about Debtor Financing or Invoice Discounting, please call us to talk to one of our consultants or email us directly and we’ll arrange for a consultant to contact you at an appropriate time.