Debtor financing is in vogue and is regarded as the main funding option for business Down Under as well as in other parts of the globe. As per reports furnished by DIFA or Debtor and Invoice Finance Association of Australia and New Zealand, this funding activity has churned out as much as $7 billion to the various businesses in Australia alone. This was the scenario way back in 2014. This funding solution is an extremely good option to access cash particularly for the smaller business entities.
In fact, experts in finance encourage and insist that accountants dealing with business clients must facilitate the procedure and also explain clients the benefits of debtor financing. This view was expressed in an article from Australian Financial Review or AFR.
While talking about debtor finance, it ultimately boils down to maintaining constant cash flow for businesses. Cash flow is of utmost importance and a failure to maintain the same has seen several business stalwarts to sink in turbulent waters. As per reports furnished by Australian Securities and Investments Commission, inadequate cash flow was one of the primary causes of insolvency in the previous years, notably in the year 2015.
As such, it is being increasingly felt that debtor financing can actually bring in some stability to the financial make up of any business entity not just across Australia or New Zealand but in other parts of the globe too.
Benefits of the concept
The main advantages are as follows-
- One of the best advantages of debtor financing is that there are many businesses, particularly the smaller ones, that use personal assets for business expansion and growth. However, in the event the business is not able to take off, in the long run, it can compel you to abandon your personal assets. It is a huge loss so this concept comes to the rescue.
- Allow more payment time to clients – If you have a steady cash flow with debtor financing, you are in a better position to allow your clients to make payments over extended period of time. And when you earn the goodwill, you are sure to get more orders from these clients as they get some respite as they are allowed more time for payment for their dues.
- Debtor financing can help you to make payments well within the stipulated period of time as far as bill clearance is concerned.
Drawbacks of debtor financing
The cons are as follows-
- This type of financing is not applicable for all businesses. This is because the business seeking financial assistance ought to have a particular turnover volume.
- The proceeds of debtor financing can be used only for meeting the cash flow crunch if customers are making payments slowly but in case you need cash for buying equipments or for business growth, this is not the right option.
- As compared to other avenues of financial aid, it is expensive and not all business entities can afford the same.
- As far as the debtor ledger is concerned, the lending company takes full control of the same. This might hamper the relationship between the business and its esteemed clients.