Everything you need to know about debtor financing

Accounts receivable financing is a financing tool in which your company obtains a loan against its outstanding accounts receivable. This helps free up much-needed working capital and makes it easier for your business to run smoothly. You can get loans in as little as 24 to 48 hours. Typically, the loan amount ranges from 70% to 90% of the debtor’s total ledger value. The fund releases the balance amount when your accounts receivable are actually realized.

Why debt financing?

Deals are almost always done on credit and sometimes it takes 60-90 days for payment to be made. Such credit terms commit working capital and affect cash flow, ultimately affecting business operations. Debtor financing can come to the rescue in such situations and help you free up your working capital and keep your expansion plans on track. The good thing about debtor financing is that real estate collateral is not needed as in conventional financing.

Different types

Debt financing can be broadly classified into the following categories:

Confidential: In this case, the financials of the business are not notified to its clients. They don’t know about the deal that is going on between the lending company and your business and they only make their outstanding payments to your company. Revealed: in this case, a notification is sent to his client clarifying that he has lent the debtors’ book and his clients make their pending payments to the financial company.

different terms

The typical timeline is 90 days. In addition, financial companies do not usually accept invoices that are more than 90 days old. If the customer doesn’t pay within 90 days, the lender typically appeals that bill, which means the credit liability reverts to your company after 90 days. Non-recourse debtor financing is also sometimes available, in which the lender assumes some of the credit risk or offers additional recourse periods (typically 120 days) for the realization of outstanding receivables. Although no real estate collateral is required, to use this type of financing, you may be required to offer collateral for certain specific assets and the personal collateral of business directors, along with your debtor ledger.

Who can get it?

There are no specific sectors per se, but generally companies that sell goods or services to companies are more eligible and are mostly the ones that use these types of facilities. However, it is important that your business has a financially sound customer base, as debtor financing depends less on the creditworthiness of your own business and more on that of your customers. It is also important that you have a strong, long-term relationship with your clients in order for you to be eligible for debtor financing.