Diversifying with debtors

Debtor finance is a financing facility that assists businesses to manage their cash-flow needs based on the value of their accounts receivable ledger.

According to Scottish Pacific Business Finance’s SME Growth Index for September, only one in five SMEs review their existing borrowing requirements and their core business banking relationships on a regular basis.

The index also showed that as few as 4.8 per cent of SMEs always keep a look-out for the credit facilities that best fit their business.

Furthermore, just over one in 10 SMEs currently turn to a commercial finance broker when reviewing their borrowing requirements or deciding on new providers. Scottish Pacific CEO Peter Langham says these statistics highlight the golden opportunity for brokers to build on existing client relationships and cement new ones by offering debtor finance.

“This is a massive opportunity for brokers to become their trusted adviser, showing them how to seek new or alternative finance options that might better suit their business,” he tells The Adviser. Apart from the obvious benefits that debtor finance gives brokers – an additional revenue stream and an expanded product range – Mr Langham says the facility attracts new clients that other brokers wouldn’t usually talk to.

“Debtor finance provides working capital for businesses to grow, and if these businesses are growing, they’ll need things such as new premises or a new piece of machinery,” he explains.

“If the broker maintains the relationship with these clients, then they will continually grow their business over time as their clients grow.”

Classifying clients

Mark Cleaver, managing director of Bibby Financial Services for Australia and New Zealand, says debtor finance clients generally fall into three categories: those seeking to improve cash flow to streamline their operations; those looking to fund more aggressive growth; and those with more specialised funding requirements, such as capital raising for mergers or transfer and sale-of-business scenarios.

“Clients do need to trade with other businesses on credit terms, so the industry profile is typically manufacturing, importing, wholesaling and business services such as transport, recruitment and labour hire, and commercial printing,” he says.

“But the industry profile is broadening, and we have recently released a new product offering suitable for sub-contractors, whereby we are able to provide funding facilities against those businesses working on a progress claim basis.”

Mr Cleaver adds that finding these types of client is relatively straightforward for brokers – have a conversation with existing clients who are SMEs about their cash flow requirements and any constraints they might have.

“The conversation with prospective debtor finance clients can be as simple as asking questions such as, ‘Does your business have the required level of working capital?’, ‘Is cash flow becoming a constraint on the business?’, ‘Are your customers paying quickly enough?’, ‘Are you fully borrowed against existing collateral?’ or even ‘Is your business intending to grow, and if so, does your current funding facility allow this?’.

Mr Langham says it is up to brokers to ensure their SME clients understand there is an alternative to using credit cards, personal loans and even their house to fund their business.

“If they are nervous because they haven’t had experience with debtor finance, any good funder will be able to provide real-life case studies on how debtor finance has worked for businesses in a wide range of industries, including transport and logistics, manufacturing, wholesale and labour hire.

“It is not a new or untested product – there are more than 4,500 Australian SMEs with combined annual revenue of $65 billion successfully using debtor finance to grow,” he says.

The misconceptions

Mr Cleaver says the biggest misconception brokers have about debtor finance is that it is complex, when in fact it can be quite the opposite.

“Most lenders will manage the application process end-to-end whilst communicating with the broker, so in effect, the broker may be as involved in the process as much as they wish to be, and according to their level of experience or comfort in settling debtor finance transactions.

“Our BDMs certainly seek to support and guide intermediaries through the process,” he says.

Another misconception that brokers have about debtor finance is that it is expensive, adds Mr Langham.

“Well, it’s cheaper than credit cards and unsecured overdrafts and probably any peer-to-peer type facility,” he says. “It will be more expensive than using your house as security, but it frees up the house so that you can
make other investments.”

Diversified debtor deals

Over the years, debtor finance has evolved into different forms through product innovation, with some providers now offering trade finance variations, funding against progress claims and funding on a selective invoice
basis. The Invoice Market (TIM) is one of those providers with a diversifed debtor finance offering. It is a peer-to-peer invoice funding platform that specialises in providing single invoice funding to Australian  businesses.

TIM sources capital from a panel of approved funders that includes SMSFs, high-net-worth investors, family offices and institutional fund managers.

“TIM’s role is the origination of invoice-funding opportunities, gathering of the due diligence requirements required to assess the transaction, presenting that funding opportunity to our panel of funders and managing and reporting each funding transaction,” CEO Angus Sedgwick says.

According to Mr Sedgwick, single-invoice factoring (also known as ‘spot factoring’) does not contract the client to factor their entire debtor book.

“They can pick which invoice/s, which debtor and when they would like to sell an invoice to raise funding. The transaction is the sale of an asset (the unpaid invoice) at a discount to the value of the asset (the discount fee paid to the funder),” he explains.

Mr Sedgwick says spot-factoring clients tend to be more newly-established SMEs which might not yet be profitable; running an ATO tax debt payment plan; or experiencing other issues that would immediately make
them unable to meet the criteria of the major banks or non-major players.

“Or they may be businesses that meet the bank approval criteria but do not want to be locked into a 12-month whole-of-turnover facility,” he adds.

Mr Sedgwick says the beauty of single-invoice funding is that it allows the client to use the service for a short period of time – even as a one-off – rather than being locked into a 12- to 18-month contract that may not
suit their business growth.

“Also, while the term implies the sale of a single invoice, you can sell us as many invoices as you like and as regularly or as irregularly as you like,” he says.

“Our point of difference is that we don’t lock businesses into contracts requiring them to fund every invoice every month to every debtor.”

Mr Sedgwick says there has been a high level of interest from brokers in this space, with TIM paying an upfront commission of 70 basis points of invoice value for the first $500,000 of invoices funded, and a trail commission of 35 basis points of invoice value thereafter, for as long as that client funds with TIM.

“This allows the broker to build a book, as they do with other finance products, that will continue to pay them income after referring a client to TIM.”

WHAT BROKERS SAY

Three brokers explain the benefits of diversifying into debtor finance

Paul Lambess, CVG Finance:

“Offering debtor finance is a great way for me to stand out from my competitors. It’s a market where brokers are diversifying – looking for new revenue streams.

Unlike some of the new fields such as financial planning, it’s a no-brainer to offer debtor finance, because brokers don’t have to start a whole new business. Debtor finance is so diverse, but it sits sweetly alongside what we are already doing, so the broker does not have to step into a whole new field with the associated costs and upskilling that comes with a new field.

So many clients still don’t understand how it works and the broker can come in, as the expert, providing great advice and an excellent solution for clients.

Finding a debtor finance solution is just a starting point. From there, I can talk about other finance options and it leads to my business winning the client’s home loan, lease finance and other products. It allows my client’s business – and my own – to grow.”

Wade Oldham, Wade Oldham Finance:

“It’s flexible – it is a facility that grows with the client. Some savvy clients reduce their own business costs by using the cash boost provided by debtor finance to obtain discounts from creditors for early payment
of invoices. I’ve also had clients successfully use debtor finance to assist with an acquisition, providing capital so the client can buy another business.”

Chris Matthews, Indefin:

“Debtor finance provides me with greater income opportunities through arranging more finance, and it strengthens relationships with clients. If you’re aware that debtor finance is a possibility, then it may well be the difference between solving your client’s problem and earning additional income, and not being able to do anything at all.”