Everything you need to know about debt financing
Debtor financing is a financing tool in which your company obtains a loan against its outstanding accounts receivable. This helps free up much-needed working capital and makes it easier for your business to run smoothly. You can get loans in as little as 24 to 48 hours. Typically, the loan amount is between 70% and 90% of the debtor’s total ledger value. The fund releases the balance amount when your accounts receivable are actually realized.
Why debtor financing?
Businesses are almost always done on credit and sometimes take 60-90 days to make payment. Such credit terms compromise working capital and affect cash flow, ultimately affecting business operations. Debtor financing can come to the rescue in such situations and help you free up your working capital and keep your expansion plans on track. The good thing about debtor financing is that you do not need a real estate guarantee as in conventional financing.
Different types
Debtor financing can be broadly classified into the following categories:
Confidential: In this case, the business finances are not reported to your customers. They do not know about the deal that is going on between the lending company and your business and only make their outstanding payments to your company. Revealed: in this case, a notification is sent to your client clarifying that he has lent the debtors book and his clients make their pending payments to the financial company.
different terms
The typical timeline is 90 days. In addition, financial companies do not usually accept invoices that are more than 90 days old. If the customer doesn’t pay within 90 days, the financier typically appeals that bill, meaning the credit liability reverts to your business after 90 days. Non-recourse borrower financing is also sometimes available, in which the lender bears some of the credit risk or additional recourse periods (typically 120 days) are offered for realization of outstanding receivables. Although no real estate collateral is required, to use this type of financing, you may be required to provide collateral for certain specific assets and the personal guarantee of business directors, along with your debtors’ ledger.
Who can get it?
There are no specific sectors per se, but generally companies that sell goods or services to companies are more eligible and are mostly the ones that use these types of facilities. However, it is important that your business has a financially strong customer base, as debtor financing depends less on the creditworthiness of your own business and more on that of your customers. It’s also important that you have a strong, long-term relationship with your clients to be eligible for debtor financing.