Cashflow is a problem for many growing businesses. You may be willing and able to take the next step in your business, but 30 day terms, or clients who pay late means there is a shortfall between outgoings, such a wages and operational costs, and the additional income that landing that big job will provide. This is particularly problematic for business with low working capital reserves.
What is Debtor Finance?
Debtor finance can help manage cashflow during growth periods. It’s one of the fastest growing working capital products both in Australia and globally. It is the process of funding a business using its accounts receivable ledger as collateral. After examination of your debtor ledger and the creditworthiness of your clients, debtor finance companies, such as Earlypay, will fund 80% of the value of each invoice as it is written, paying the remaining 20% less a small fee when the client pays the invoice.
In essence, it’s a line of credit secured by your invoices.
Advantages of Debtor Finance
- Increase in cash flow can help your business fulfill orders, get on top of your operating expenses, take advantage of early payment discounts, pay wages and suppliers on time, and start investing in expansion.
- It’s quick. Payment is usually provided within 24 to 48 hours.
- The amount you can borrow is not static. If your business grows, so does the amount you can borrow. Unlike an overdraft, it does not have a fixed ceiling and can fluctuate with business cycles and seasonal factors.
- No real estate security is required.
- Makes the most out of your receivable to fund business growth.
Earlypay Success Story
John, the owner of an IT recruitment business worked hard to manage his cashflow. With 38 contract staff spread across 8 clients, the collection of revenue from clients and funding the payroll was a finely tuned balancing act. When John’s largest client requested a further 15 contractors on the basis that he change from 14 to 30 day terms, he had mixed emotions. He was ready to expand his operations, but how could he carry the required wages for up to 6 weeks? To meet his client’s expectations, he would need to find an additional $870,000 to manage the new cashflow requirement!
John thought it was foolish to use his house as collateral and in any case it lacked sufficient equity. When looking at traditional factoring he was told there would be too much concentration on the one client and that he could only borrow a small percentage of what he needed.
Just when John was thinking he may lose this opportunity to grow his business, he heard about Earlypay. Through debtor financing he was able to obtain 80% of the client’s invoice which was enough to cover his out of pocket costs. John was able to keep his client happy and was no worse off as he built in a little extra margin to cover the cost of the finance.
If cashflow is inhibiting the growth of your business and you’d like to learn more about debtor finance, contact Lex Brown on 0418 596 196 or visit www.earlypay.com.au