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Business owners often seek out methods to support their cash flow in order to get them through difficult times. A common cash flow support method for businesses is known as debtor finance.
Debtor finance (a.k.a: ‘factoring’ or ‘accounts receivable finance’) is essentially a way for business owners to give themselves some breathing room (a.k.a: cash) from their outstanding debts so they can keep focusing on the rest of their business.
You may have come across the term ‘equity financing’, which involves sourcing money from within your business, while debtor financing involves sourcing it externally. You can learn more about the differences between debt and equity financing here.
If you choose to use debtor finance for your business, it would involve the following:
It’s important to remember that while this process can allow you to continue running your business smoothly, it’s highly recommended that you seek out financial and legal advice before signing an agreement.
For context, it’s also a little like getting a secured business loan for buying an asset (such as new equipment or a business vehicle) – but in this case, you’d be securing your loan by using outstanding business debts as your ‘secured asset’.
Generally speaking, it can give businesses a steadier cash flow so they can more easily do the following types of things:
However, some of the cons of debtor financing include
This is a confidential process where a business can be provided with instant funds for most of their outstanding debts.
Essentially, as a business owner, you would apply for invoice discounting by applying for a business loan and use your unpaid debts as security. As mentioned earlier, this is similar to a secured business loan, which is a way some businesses choose to finance a commercial vehicle purchase.
It’s also important to remember with regards to invoice discounting, although you would be receiving a boost of cash from your lender, you would still be in control of dealing with your customers and fulfilling payments.
This is similar to invoice discounting, but ‘factoring’ your invoices means you would be required to sell them to a factoring company, and your customers would be notified that a factoring organisation is in charge of collecting debts.
If you do choose to go ahead with invoice factoring, bear in mind that the factoring company you choose to work with will be liaising directly with your customers to collect outstanding debts. This means that you might want to consider a reputable company that has a wealth of experience in dealing with collecting debts.
Make sure you do lots of research on a factoring company before signing the dotted line with them, as in some cases, liability can fall on your business if debts aren’t paid.
There are quite a few businesses that might consider debtor financing listed below.
Just as you would consider different factors when comparing personal loan providers, there are a few things to consider when you’re on the hunt for a business debt financier.
Unfortunately, there may be unlicenced providers which you may want to avoid. You can check this list of unlicensed companies, and learn how to check if a company is licensed here. At iSelect, we’ve partnered with Valiant to help make the process of securing financing easier and less complex.*
Valiant works with a range of well-known Australian banks and non-bank lenders, so you can count on them to help you choose a suitable provider.
You can start here with us at iSelect, as we’ve partnered with Valiant to make the process of comparing and securing finance options for your business seamless and simple.* Click here to get started today.
Last updated: 6/12/2021