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Business Advice/Guide

Preparing Your Business To Use Debtor Finance

So you’re thinking about debtor finance? It’s a seriously effective way of getting your business’ cash flow going, and unlocking the considerable benefits of positive cashflow.

But what exactly are those benefits? And how do you go about finding a debtor finance facility? 

This is everything you need to know about using debtor finance to grow your business.

TL;DR

Using debtor finance helps to minimise your long term liabilities and finance business growth, but it pays to have a solid understanding of your business’ finances before you do. It’ll help to maximise the benefit you get and understand exactly how much finance you need.

Understanding debtor financing arrangements

Debtor finance goes by a few other names, including invoice financing and invoice factoring. Whatever you call it, understanding debtor finance/invoice finance is the first step. 

It’s a way of leveraging your business’ invoices for lending. Essentially, it involves selling a small portion of your invoices to a debtor finance facility.

Why use debtor financing? 

Because cash flow is critical, particularly for smaller businesses. 82% of businesses that fail do so because of poor cash flow. They fail because they have bills and wages to pay, stock to purchase or an investment to make that wasn’t possible because they didn’t have the cash on hand.

More than just surviving, cash flow is critical to grow your business. Businesses that use FundTap to provide invoice financing grew their revenue by 54% over two years because they had the cash on hand when they needed it.

With debtor financing, businesses can get advances on their invoices to use for all those important things that enable them to survive, grow and thrive.

How does debtor finance work?

Debtor finance works by partnering with a specialist lender that isn’t a bank, but that provides cash advances to businesses based on their invoices. By selling the invoice, businesses get quick cash immediately, for whatever it’s needed for, without waiting for their customer to pay. 

For example, FundTap is able to fund businesses the same day they apply for cash. When the customer pays the invoice, the value is automatically repaid to FundTap, plus a small fee.

Debtor finance differs from traditional lending, such as a small business loan, in that it’s much easier to get credit and it’s paid off quickly – as in, as soon as the invoice is paid. You don’t carry a loan on your books for years. When used well, debtor finance can also be cheaper than traditional lending.

This makes it one of the most popular small business funding options today. 

Debtor finance interest rates explained

So what kind of debtor finance interest rates can you expect? As with anything there can be a big range between providers, but pay attention to all the additional fees and go with a provider that has a low cost and simple fee.

With FundTap, fees start from as low as 4% of the invoice value. It’s a single, transparent fee. 

FundTap also has none of the sign-up fees, administration fees, documentation fees, early repayment fees, monthly or annual fees that many other lenders – including other debtor finance providers – have. 

This is one of the great benefits; the cost of debtor finance when used well is incredibly affordable. 

Benefits of invoice financing for your business

Invoicing can be a fraught financial model. Payment periods of 30 days or more mean businesses have to wait to receive payment from customers/clients, and they have overheads due in that time. 

Not only that, but they have stock to buy, staff to pay and opportunities to reinvest back into the business to grow. 

Invoice financing is a fantastic tool for being able to cover these costs and opportunities to grow while waiting for invoices to be paid. 

Is it really that effective? Absolutely. As mentioned, FundTap customers have used debtor financing to grow by an average of 54% in the past two years. Very few other business financial solutions come with this kind of benefit.

The convenience of debtor financing also makes it easy for time-poor business owners to arrange. Businesses can create a FundTap account in just five minutes and be approved for lending in just one day. This is much more efficient than other debtor finances, considerably quicker than a bank, and it takes much less of your time.

Getting funding is simple too – it integrates into your online accounting system so all you need to do is select the invoice you want funding for and submit it. You can have the funds in your account that same day.

Businesses that use debtor funding don’t have to carry large liabilities on their books for a long time. Lending is available for any amount you invoice for – not the minimum $100,000 that banks often offer for a small business loan. When the customer pays the invoice, your business repays FundTap. It’s that easy!

Steps in preparing your business to use debtor finance

Plainly, there’s a lot to like about debtor finance solutions – not least the costs that financial invoicing can help with.

But what do you need to do in order to get it? Getting approved for debtor finance is actually quite simple, but before you do that, it’s worth making sure your business is set up to unlock its advantages.

Create a business model that works

Your business model helps you to project your growth, including your revenue and costs as you grow. You can use it to identify how much money you’ll need to get started, and how much you need to make to cover costs at different times.

A business model should include:

  • Cost breakdowns, such as wages, transport, rent, electricity etc.
  • Customer and sales estimates
  • An understanding of your limitations, such as the space you have to serve customers or the size of the market you’re operating in
  • Be based on or benchmarked against others in your specific industry

A business model is important because it provides a guiding light for your finances. It shows you where you’re at, helps you to see where you’re going and gives you an understanding of the level of debtor financing you may need.

Set a budget

Your business plan is an outline of where you’re going, now your budget is your roadmap of how you’ll get there. At this point, you’ll know what your costs are, so you can think about how you’ll cover those costs.

What will your profit be at the end of the year? When are payments for your costs due? 

Once you have your budget, it’s important to update it as you go to see if you need to reset or revisit any expectations. 

Keep track of your finances

Maintaining the books may not be every business owners’ idea of fun, but it’s critical you know what’s going on in your business at all times. Keeping track of your finances is how you do that.

When it comes to using debtor finance, knowing your numbers is vital. Cashflow is hugely important, and by monitoring your finances you can identify if you have an issue in advance. It lets you see if you need to take action, and how much money you need.

Keep on top of debtors

If you’re a business that sells via invoices, it’s important to keep a handle on the level of debt you’re allowing your customers to have. Remind customers if they have outstanding invoices, chase late payments and keep an eye on any customers that may have issues with their accounts.

In monitoring your accounts receivable, it’s worth thinking about if there’s anything you can do to encourage your creditors to pay you faster. Better customer relationships get invoices paid faster, and you may be able to make systemic changes that encourage customers to pay invoices promptly. 

Get an advisor if you need help

For some business owners, the financial side of the business may not be your strong point. You may not be sure if debtor finance is right for you.

Talk to someone about it. Make sure you have a good accountant who knows your business and how to maximise it. A good bookkeeper to help you keep on top of the books can be worth their weight in gold.

You may also have a trusted advisor or someone with expertise who can advise you and answer any questions you might have.

If you’re not sure, FundTap’s flexibility does really come in handy. Unlike other debtor financing services, FundTap allows users to select only the invoices you want funding for, without penalty. There’s no obligation to use FundTap and you won’t pay for anything you don’t use. 

You don’t need to be adept at crystal-ball gazing to predict what your needs might be in six months as you only use FundTap when you need it.

Take home message

Debtor finance really is a fantastic tool for small businesses. If you haven’t used debtor finance before – or even if you have – FundTap offers flexibility and affordability that makes it stand out from other providers.

Flexibility allows you to stay in control of your customer relationships, because FundTap doesn’t communicate with them at all. Other providers require your debtors to pay all invoices to their account, not yours, which means you have to change the bank account that customers pay into. 

They chase up late invoice payments, which means they communicate with your customers on your behalf and give away that you’re using debtor financing. For business owners that prefer to be discreet about the funding they use, this may not be what you want.

Also, FundTap’s rates are among the lowest you’ll find. Find out more with a free account, or check out a demo today. 

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