A major obstacle in the growth and development of a business enterprise is having inadequate cash to finance the increase in business operations. Any business enterprise may require additional liquid funds at any point of time to cover everything from increase in wages and salaries, higher debtors and stock levels, additional plant and equipment and a general increase in business overheads.
The type of business funds that you use to finance the growth of your business will be different from those used for other purposes. However, whatever form of finance you choose, it is essential to match the finance facility with the purpose. For instance, if your business plans are to build an addition premises like a warehouse, then you need to consider a long-term financial arrangement with your financier. However, both cash flow and working capital needs require a different approach altogether. While a number of business enterprises will opt to finance their growth and tide over their cash flow problems with a bank overdraft or bill facility, this may not always be a practical financial option.
Many small and medium business enterprises are now turning their attention to debtor financing to overcome their cash flow problems. Debtor financing commonly referred to as receivable financing, cash flow financing in Australia and invoice financing is a financial facility whereby the business enterprise sells its unpaid invoices to a financier who will advance instant cash equivalent to seventy-five to ninety percent of its outstanding invoice value. Once the clients of the business enterprise have paid their dues, it will get the remaining amount minus the sum charged as factoring charges.
Under this financial facility, the business enterprise enters into a factoring or invoice discounting arrangement with a financier or lender, whereby the enterprises deposit all its unpaid invoices to the financier once they have been raised. The financier will advance the necessary cash within forty-eight hours. Once the outstanding invoices are paid, the business enterprise will get the remaining amount less factoring charges.
Debtor financing or invoice financing is a great financial option for businesses hoping to enhance their cash flow and their sustainability throughout the year. These business enterprises can have access to liquid funds that is in line with their growth without the burden of a traditional banking lending requirements. This gives such enterprises room to expand and enter into new contracts when necessary.
Moreover, the business enterprises can avail these funds within five days that aids them in making decisions and purchases, which will help them to expand at a pace that suits them and their clients. Learn more about short term business Loans here.
The advantages of debtor financing are as follows:
- Provides the business entrepreneurs more time to manage and grow business while the financier handles their account receivables;
- There no need to hire additional staff to collect the funds from their business clients;
- The instant cash is available within twenty-four hours after invoicing;
- Better control and more reduction of bad debts;
- More flexibility over a conventional bank loan; and
- The business enterprise has access to a line of credit that grows in relation to its turnover.