February 05, 2018
Debtor finance is a line of credit secured against accounts receivable. It is a form of finance that provides access to working capital that would otherwise be tied up in receivables for 30, 60 days or more.
It is also known as invoice finance, factoring, cash flow finance and invoice discounting.
How does it work?
Debtor finance is a flexible cash flow facility. A business invoices their client directly and uploads the invoice to the debtor finance provider.
The provider will, typically within 24 hours, advance up to 80% of the value of approved invoices, less fees. The remaining 20% becomes available to the business when the invoice is paid in full.
What are the benefits of debtor finance?
Debtor finance facilities are self-liquidating. Instead of taking on additional debt, an advance is offered on money that is already owed to the business.
Unlike most overdraft facilities, debtor finance does not generally require property as security.
It is a growth enabler, enhancing cash flow to fund extra staff, additional stock or capital expenditure but can be used in a seasonal situation.
It is a standalone facility that can sit alongside other business borrowings (such as term loans and leasing).
As a business grows, the facility grows with it. Once the debtor finance facility is in place there is generally no need to re-negotiate increased facilities as available funding grows in proportion to sales.
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