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The Adviser speaks to Indefin co-owner and broker Chris Matthews about what debtor finance has done for his business.
In your own words, what is debtor finance?
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Debtor finance is a form of funding whereby the amount that can be borrowed fluctuates (usually daily) in line with movements in the borrower’s receivables ledger. The amount available to borrow on any given day is usually a percentage of eligible receivables.
For example, a business may have a receivables ledger of $2 million on a particular day. Of those receivables, $100,000 may be due from customers of questionable quality or credit risk and another $100,000 may be due from customers where the obligation to pay is subject to some uncertainty. Those two categories of receivables may be considered ineligible, leaving only $1.8 million of eligible receivables. A debtor financier might be prepared to lend 80 per cent against those eligible receivables, meaning that $1.44 million might be available to borrow on a debtor finance facility on that day.
As a business makes new sales (on credit terms, hence creating new receivables) and as debtors pay their outstanding invoices, the balance of eligible receivables will change, and so too will the amount that can be borrowed on the debtor finance facility.
How long have you been involved in debtor finance?
Ten years – three years in credit and seven years structuring and negotiating debt often involving debtor finance.
What benefits has your business seen since you became involved in debtor finance?
Debtor finance can be a solution available to clients who might not otherwise be able to raise the debt they need from more basic debt facilities with banks. Being able to create a debtor finance solution for clients can be the difference between getting a deal done (and thereby earning income) versus not getting a deal done at all.
How significantly has your client base grown since becoming involved in debtor finance?
It’s more than half of what I do.
What’s been the feedback from clients?
Clients without previous experience of debtor finance usually react with concern at first, followed by surprise that they can raise the debt, followed by concern about how debtor finance works from day-to-day, followed by kicking themselves for not having considered debtor finance years ago.
Why is it worth brokers investing in this space?
Greater income opportunities through arranging more finance, and it strengthens relationships with clients.
Do you think there is a growing demand for debtor finance?
Yes, for two reasons. Firstly, as world economies change, technology changes and business models change, we can see more and more business ventures starting with relatively little equity capital and relatively little in the way of hard assets such as property or machinery. Once these ventures start trading, often their greatest tangible asset is the receivables ledger. A small business owner can only afford to give so much credit to customers. As a business grows, so too will the amount of capital tied up in giving credit terms to customers. Debtor finance is often the only solution.
Secondly, increasing competition coupled with a sharpening focus on return on equity. All other things being equal, customers will move towards those suppliers offering longer credit terms, seeking to minimise their investment in net working capital and hence maximise return on equity. Conversely, offering longer credit terms requires capital. Debt more often than not is cheaper than equity and debtor finance can often be the most efficient form of debt for that purpose.
How difficult is it to understand debtor finance?
Anybody with half an hour to concentrate on it will understand debtor finance if explained by somebody knowledgeable on the topic – it’s not difficult to understand. However, experience is required to recognise when debtor finance is appropriate, when it’s not and how to present a credit case to a financier.
For brokers looking to introduce debtor finance to their business, what should be their first steps?
They need to educate themselves about debtor finance and seek help from other brokers with experience.
