Debtor Finance Explained

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There are a lot of ways on how you can finance your business. Small business owners often times allow their customers to pay 30 days after the actual purchase. This type of setup, though normal, can be detrimental to your cash flow. Could you imagine having zero cash flow for the next month or so? This can be problematic considering the fact that you need to pay for different responsibilities such as rent, salary of your employees, and many other things in between.

This is where debtor financing enters the picture. It provides you with loans considering that you have accounts payable.

How do you get approved?

Keep in mind that the companies offering debtor financing are also taking necessary steps to make sure that you pay them back. For one, they will look into your financial statements. Is your company doing good if you have consistent cash flow? Does your business organized and it functions smoothly if it has funds?

Also, it is important that the clients have good commercial credit. This means that they will be able to pay you and consequently, your company can pay the debtor financing firm. Credit worthiness of your clients is always looked closely by companies offering debtor financing. It is common that they only stick to financing transactions made by clients that have good payment histories.

It is also important to have the invoices verified. Keep in mind that the debtor financing option is only for those companies that have invoices that they will eventually receive in a couple of weeks. Most of the time, the invoice should be due in less than 60 days. Also, there should be no dispute or any problem whatsoever about the purchase made by your client.

What are the downsides?

There are some downsides to this option that you need to be aware of. For instance, unlike the regular loan that you get from banks, this option typically has a higher interest rate. That means it is likely to gobble up a good amount of your profit in the long run. Also, it is considered a last resort for many small businesses. It is often times seen as the last option of those businesses that are really struggling with their cash flow.

Should you be taking a debtor financing option?

It is important to ask yourself if you really have no other option for your cash flow. Why not settle for a regular loan? Keep in mind that this option will eventually catch up with you if you are not expanding considering the higher interest rate that it offers.

If you are going to run your business and you are taking payables that will be settled in a few weeks, it is always a good idea that you make sure that you have a buffer. It is important to make sure that you have enough money to keep the business running. You also need to make sure that you have sufficient funding that can answer to unexpected things such as equipment that will need some repairs. There are instances when it is better to scale down your operations to avoid these loans.