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.
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.
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.
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.
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.