Straight Up Gen Y Girl Talk on Debtor Finance

 In Daily Column, Debtor Finance

As the new girl in town here at AR Cash Flow, I’m often left pondering a few questions when it comes to our core products.

You see I come from an advertising background- before AR the only time I even thought about debt or finance was when I got my monthly statement from the bank.  So it got me thinking why do people choose debtor finance over the big banks? Why not get one big lump sum from the bank and call it a day? I decided it was time to put on my finance cap and find out why debtor finance is the way to go for SME’s.

So it’s a pretty well known fact that most businesses have to offer credit terms, usually of 30 days in order to secure orders from customers? But did you know current statistics show that invoices can take up to 60 even 90 days to be paid. This delay as you can imagine can reduce essential cash flow and restrict the growth of a business.

And if you have just started a business, and extending credit to a majority of your clients is a requirement and not a choice, then you’re about to say hello to some serious cash flow problems and begin the slippery slope to a failed business. No incoming cash and you can forget your employees, say bye bye to suppliers and paying rent well you can just forget about it. You get the drill. You don’t have time to sit and wait to be paid. You need continuous cashflow to sustain your business.[blockquote]Factoring or debtor finance is a financial transaction whereby a business sells its invoices to a third party (AR Cash Flow) at a discount exchange for immediate money with which to finance continued business.[/blockquote]

Debtor finance differs from a bank in multiple ways, the main being that the emphasis is on the receivables (invoices) and not on the businesses credit.

Debtor finance make funds available, even when banks won’t, because its primary focus is not on the credit worthiness of the client, but their customers  who are obligated to pay the invoices for goods or services delivered by the client. Basically the bank only cares about the credit of the borrower where as debtor finance cares about the credit of the clients debtors or customers.

With the focus not being on the business borrowing the money, it takes the pressure off passing all the tedious if not impossible bank checks. With debtor finance there is no red tape with a bank get ready for impossible forms, credit checks and putting your entire life on the line as an assurance.

Another red cross for the banks is they only deliver a one off lump sum amount into your account, which needs be paid back usually along monthly with interest over a fixed period of time. This is very restricting – what if you require additional money during the loan period? It would be extremely difficult to acquire. However, since debtor finance only depends on the total value of invoices that you sell to the finance company, it is a much more flexible way to get money.

With the bank’s main priority being receipt of your payments plus interest each month, if you fail to make this payment, they can seize your collateral, in order to recover their lost money. Bye bye house!

This wouldn’t happen with debtor finance as everything depends on the invoices that you finance to the Debtor Finance company.

So it seems for SME’s, a factoring solution is much more suited to provide long term security and to secure a thriving and growing business.

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