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Debtor Financing and How It Can Help Your Business

One of the many problems that plague small businesses is cash flow. As of 2017, only 50 per cent of Australian small businesses were cash-positive in any given month. You can imagine that this is far worse now during the global recession and pandemic.


While many Australians dream of starting their own businesses, studies show that Australians have to develop better business sense and accounting skills for their businesses to survive.


One recommendation many small business accountants make is debtor financing. These are good solutions for long-term businesses, as they can provide capital without adding to your long-term debts. That being said, there are some considerations you’ll need to take into account before you make this financial decision.


The types of debtor financing


The types of debtor financing are as follows:

  • Invoice financing. This is when invoice financing companies provide a cash advance based on your unpaid invoices. The amount you might receive upfront could be anywhere between 70–90% of the amount owed in as short a time as a day. Once the invoice has been paid, you will receive the remaining amount minus the financing company’s fees.

  • Invoice factoring. Invoice factoring companies take on the responsibility of settling your invoices. As such, they will interact with your customers in order to do so. Depending on your agreement, either you or the company might assume the responsibility of unpaid invoices.

The benefits of debtor financing


Conventional loans involve long-term debts that need to be included in the balance sheet throughout the year. On the other hand, debtor financing fast-tracks money that is already owed to you. That means you can use it to gain capital when necessary.


Small business accountants also prize it for having easier calculation requirements compared to commercial loans and overdrafts. Not only that, but it is also more accessible for smaller businesses with lower revenue or lower credit ratings.


The best part about this might just be that it creates a steady stream of income that does not involve interest rates or secured assets.


How do I know debtor financing is right for my business?


Both solutions are fantastic for businesses that are seasonal or experience seasonal highs and lows. They are also great for freelancers who might experience revenue slumps. They are also great for organisations with clients that can take longer to settle their invoices, like government agencies and corporations.


Another fantastic thing about this is that it transfers the responsibility of handling paperwork and accounting to the finance provider. It means you will not have to spend so much of your time chasing invoices, allowing you to devote your efforts to other priorities. This makes it easier for both your business and your accountant.


In conclusion


Whatever industry you are in, and however small your business, it is crucial to take every edge and advantage you can get. Debtor financing can give you this advantage and secure your finances during those low revenue points of the year.


If you’re looking for a small business accountant at Gold Coast, send us a message at New Wave Accounting. We have what it takes to make sure your finances are handled better.

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