February 13, 2019
If you are a small or medium sized business owner and need to find a way to improve your cash flow, you may be considering debtor financing or debtor factoring.
Do you struggle with customers (debtors) taking too long to pay the invoices you sent them? What if you could access funds tied up in your debtor’s book today, to help your business grow? Debtor financing allows you to do just this.
If you’d like to know more about the debtor financing options available to you, here’s a guide to how debtor financing works.
What is Debtors Financing?
Debtor financing is a type of financing where a financial institution purchases a company’s debtor book or lends money against it. A “debtors book” is just a collection of all of your receivable invoices. This type of finance is also known as Invoice Financing, Invoice Discounting or Factoring. Essentially, it’s a tool that business owners can use to unlock value within their business to improve their cashflow or grow their business. With debtors factoring, a business can accept longer payment terms from their corporate customers and therefore take on more or larger projects. Alternatively, a business can also use debtors factoring to overcome cash flow issues if they’re struggling to survive while they wait for their customers to make payment.
Why apply for debtors factoring instead of an unsecured business loan?
Debtors factoring is a great way for small and medium-sized businesses to get the working capital they need to solve cash flow issues and to accelerate growth. Your debtors book, or receivable invoices, are actually assets. These can serve as collateral enabling you to get more finance at better rates than if you applied for an unsecured business loan which doesn’t require any assets as collateral. Unsecured business loans tend to have high interest rates.
What are the disadvantages of debtors factoring?
Debtor finance, or debtors factoring, usually involves the selling of a company’s invoices to a factoring company. While debtor factoring is a useful tool for a company struggling with cashflow, it does have some disadvantages:
- Disclosure to your customers. First and foremost, the sale of the invoice usually needs to be disclosed to your customers. Your customers are informed that the invoice you issued them has been sold to a factoring company. While there’s nothing inherently wrong with this, some businesses don’t want their customers knowing about their financial situation. They’d rather keep their business finances private.
- Redirection of payments. After disclosing the invoice sale to your customers, you will also have to instruct your customers to rather make payment to the factoring company instead of you. The factoring company will therefore collect payments directly from your customers. This means your relationship with your customers is compromised, and your business’s reputation may be damaged when the factoring company starts chasing your customers for payment.
- Only get 75% of your debtors book advanced. The factoring company will usually only advance you a percentage of the total value of your debtors book. This percentage can be anywhere from 65 to 90%, but is usually around 75%. For example, if all your debtors owe you a total of R1,000,000 (your “debtors book”), a factoring company might only advance you up to R750,000.
- Full debtors book is required. Factoring companies will usually require you sell your entire debtors book and won’t accept single invoices at a time. If they do accept single invoices, they’ll usually have to be very large invoices. A debtor’s finance facility is usually only offered if you have a large debtor’s book (over at least R1 million), so it’s not ideal for business owners looking for a smaller cash injection.
- Blue chip customers are needed. Most factoring companies will require you to have large blue-chip corporates as customers in your debtors book. The reason for this is that it is less risky for the factoring company because those customers are more likely to pay your invoices. This can be difficult for many small and medium-sized businesses who don’t have such large corporates as customers.
- Lock-in periods and hidden fees. Factoring companies will typically have very strict lock-in periods for a factoring facility they grant you. There will also be penalty fees if you try to settle your facility early, before the end of your lock-in period.
A better alternative to debtors factoring
If you’re looking for a way to unlock cash stuck in your debtor’s book, you should consider the advantages of Bridgement invoice financing. This new form of invoice financing involves a sale of your invoice (like debtor factoring) but is completely undisclosed. That means your customer will be completely unaware of your invoice finance from Bridgement. You remain in control of your customer relationships and continue to collect payment from them as you normally would. Unlike traditional debtor factoring, Bridgement advances 100% of the invoice value. What’s more, you can get an advance on a single invoice (instead of your whole debtor’s book) for amounts as low as R10,000. It’s also ok if you don’t have any blue-chip corporate customers.
How Bridgement invoice financing works
With Bridgement, you can get a cash advance on one or all of your invoices, while staying in control of your debtor’s book and your client relationships.
- The online application process is quick and simple. Bridgement has a revolutionary 2 minute application process – no complex forms, no paperwork. You simply create an account and select your accounting or invoicing software. Bridgement will then find all your unpaid invoices and determine the amount of finance you are eligible for. You don’t pay any sort of application fee, and you’re under no obligation to take out any finance after you’re approved.
- Once approved, take just what you need. The process is extremely quick – your Bridgement finance facility will be approved within 24 hours. You could get a facility of between R10,000 and R1,000,000. Once approved, you get to choose which invoices you’d like to receive an advance on – choose one or many. Simply request your invoice advances from your Bridgement dashboard, and the funds will be sent your way immediately.
- You pay one transparent fee per invoice. There are no hidden fees or extra costs – Bridgement will always tell you how much you will be paying upfront. Monthly fees start from as little as 1.7% and will depend on a number of factors including the strength of your invoices and your business situation. You even get rewarded with an early settlement discount if you decide to settle early.
Try Bridgement Invoice Financing and find out how much you qualify for. Apply today and get an answer within hours. There’s no application fee or obligation, so it’s certainly worth trying Bridgement invoice financing for yourself. If you’re looking for a convenient way to improve your cash flow, try our 2-minute application process right now.
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