Debt that grows business

A recent My Business SME Insight survey revealed that 78 per cent of small business owners regard cash flow as the most important aspect of finance for their business. However, part of the difficulty of accessing cash flow is beyond the business owner’s control.

It often comes down to payment from clients. Major companies are taking longer to pay for services, putting the smaller businesses in a vulnerable position.

Small Business Ombudsman Kate Carnell earlier this year revealed that the biggest complaint from business owners is the negative impact late payments have on cash flow.

This is where the value of debtor financing comes in.

It is a common misconception that customers only seek debtor financing if they are in big financial trouble. While that may be the case in some instances, debtor financing assists many stable businesses and plays an integral part in supporting the Australian economy.

Broker benefits
Market leader in SME financing Scottish Pacific handles more than $13 billion of invoices a year, and provides debtor and trade finance funding exceeding $800 million.

The company’s CEO Peter Langham says debtor financing can play an important role in the relationship between broker and client.

“The most important thing is that, because debtor finance is such an integral part of any business’ working capital, it tends to result in a long-term relationship with the broker,” Mr Langham says.

“As a business grows, it’s going to need more equipment and assets, and the owners may even want to buy a bigger house.

“If that business becomes more successful and the broker was instrumental in setting up debtor finance, they’re going to go back to the broker for even more finance.”

By including debtor financing into their list of services, a broker is ensuring the client can continue to trade and is trading competitively.

Brokers can also expect to earn income from referrals. This will vary depending on the type and size of the facility. At Scottish Pacific, that income is available for the life of the facility.

“If the client stays with us for 20 years, the brokers are going to get income for 20 years, whereas home loans on average refinance around every five years,” Mr Langham says.

First-hand experience
Equipment and asset broker Samantha Graham of QPF Finance Group recently started offering debtor financing after she witnessed some of her long-term customers struggling to meet cash flow demands.

“I realised they were starting to feel a cash squeeze, and that was mainly due to their clients dragging out payment terms to 60 or 90 days,” Ms Graham says.

“They were used to being paid in the fortnightly time frame and now that’s being dragged out for months. There’s just not enough cash around to keep everything working in the short term.”

Ms Graham realised debtor financing was an option when lenders started making brokers aware it was available for their clients.

“I think, once upon a time, there was a bit of a stigma around debtor finance. But that’s really from 25 years ago, when it was a different product,” she says.

In one of her first transactions, a long-term client approached Ms Graham about an asset loan for a new truck. When she looked into the client’s financial data, she uncovered a major cash flow shortage.

Ms Graham says the client was initially resistant to debtor financing which they associated with bad business. To bring them around, she showed the client that debtor financing was not an indication of a failing business, but a result of their clients taking too long to pay.

Ms Graham sat them down and created a cash flow diagram that showed them how money was coming in and out of the business.

“This way, I was able to show them on the timeline that it was just not matching [up] anymore. I then illustrated on the board how debtor financing helps the timeline to match,” she explains.

It is also worth advising clients on one of the hidden benefits of debtor financing – many suppliers will offer a 5 to 10 per cent discount incentive if they pay within a fortnight.

“If the business has the cash available and can pay the bill immediately, that often more than offsets the cost of debtor funding,” Ms Graham says.

Having a good lender who will walk the client through the first few deals has been valuable Ms Graham. In her first deal, the client knew nothing about debtor financing, but lender Scottish Pacific organised several joint meetings with her and her client to help them to understand the situation.

“While I can explain to them the value of the transaction and how it’s going to happen, there’s a bit of back-end stuff that deals with the accounting packages. It’s really practical to have [the lender] explain the practicalities of it and add credence,” Ms Graham says.

True believer
Veteran broker and managing director of Bayside Residential, Kevin Wheatley, has worked with debtor lending for more than 20 years, from both sides of the business. He is now a firm advocate of debtor financing and its benefits to Australian businesses.

Mr Wheatley believes many brokers walk away from debtor finance because they don’t understand it. Every week, he mentors resi brokers about the situations and clients debtor finance can be used for.

“In years gone by, when people were seen factoring [in debtor finance], it pretty much meant you were cash-strapped. But today, debtor invoicing is a far better facility than an overdraft. Because you can grow your business on it. And there’s a lot more people using debtor invoicing now,” he says.

Mr Wheatley says it’s not just struggling companies that are using debtor financing. Debtor finance has become a well-established practice at all levels.

Bayside is in the process of setting up a $30-million debtor facility for a subsidiary of one of the biggest engineering companies in NSW. The subsidiary has won several major contracts and requires immediate cash flow to fund recruitment.

“A debtor invoice facility can be an evergreen. It grows with your business. An overdraft can’t grow with your company and it has limitations,” Mr Wheatley says.

“Because debtor financing has now become a very competitive market … it can be cheaper than an overdraft.”