Debtor finance: An emerging market

The market has plenty of opportunities for growth, and is poised to take off in Australia, according to Neil Tunstall, managing director of Thane Financial.

“Debtor finance is one of the fastest growing working capital products, not only in Australia but also worldwide – particularly if you look at the UK,” Mr Tunstall says.

“The UK market has something like 46,000 to 48,000 businesses operating in this space, turning over about £212 billion per annum. So it’s becoming quite a major finance area.”

According to Mr Tunstall, the Australian market is likely to mimic both this growth and the increasing popularity that debtor finance has enjoyed in other economies.

“What we tend to do in Australia though is we tend to be slow adapters,” he says. “Australia is in the infancy stage with this market, but there is enormous room for growth. There are a number of new players who are looking to come into the market as well. This will continue to happen, particularly as we’re in a fairly interesting stage of the credit cycle.

“I think there is a lot of room for the product to continue to improve.”

So, what is it?

“Debtor finance is a financing facility that assists a business to manage its cash flow requirements,” Deloitte’s senior analyst, forensic, Chris Wood explains. “In simple terms, the financier lends cash to a business based on the value of its accounts receivable ledger. This provides the business with the benefits of cash from a credit sale sooner.”

Figures from Deloitte show the Australian debtor financing market is estimated to have grown from $11 billion in 2000 to $59 billion in 2010. According to Mr Wood, a number of larger banks have “exited the product” in recent years, “while additional smaller financial institutions have added it to their portfolios”.

The numbers, it seems, are continuing to increase.

The Debtor and Invoice Finance Association of Australia and New Zealand (DIFA) says the “total debtor financing turnover in the December 2012 quarter was $16.6 billion – an increase of 2.9 per cent on the September 2012 quarter”.

So, what’s happening in business and why is this market growing?

Analysis carried out recently by research firm Dun & Bradstreet reveals that the average time for an invoice to be paid is now 54 days.

For growing businesses, this is clearly problematic. Paul Lambess, owner and finance broker at CVG Finance, believes that debtor finance is in many cases the obvious solution.

“In the fast-paced business market of Australia, cash flow is critical to a business’ growth and success,” he says. “Debtor finance is a specialist finance product that funds 80 per cent of an invoice cost within 24 to 48 hours.

“Upon payment of the invoice, the remaining 20 per cent is cleared into the client account, minus interest charges.

“This product is a cost-effective way to fund growth and has assisted many businesses to finance growth without the requirement of the typical ‘bricks and mortar’ security.”

Wayne Smith, general manager for Queensland of debtor finance provider Scottish Pacific, agrees: “Debtor finance is typically needed where a business is growing,” Mr Smith says. “That’s where the product works best because the growth becomes self-perpetuating. You can raise an invoice and get cash for that invoice to pay for stock, pay for wages and raise more invoices without having to wait to get paid.

“That’s the real benefit of it.”

Scott Smith, director of Cairns Finance, says debtor finance offers real solutions to clients who are at the mercy of economic and business cycles.

“Debtors are a dynamic asset,” he says. “They can fluctuate with business cycles and seasonal factors. Most growing businesses will see their debtors growing over time and debtor finance can potentially grow too – unlike an overdraft which is for a fixed ceiling and/or leverages a fixed asset to support it.

“Currently, I see many good quality businesses grow even when economic activity across many sectors is modest. On the flip side of this, the value of the directors’ homes may be much more stagnant which means that the business may struggle to obtain the assistance they need to continue to grow.

“This has seen debtor finance for some time be one of the fastest growing products in the business finance suite.”

According to Mr Smith, the value of this product to businesses is clear: “It’s very simple: cash is king in a business. Profitability, regardless of how large, simply does not pay bills and cash does.”

The bigger picture

As a broker, you may not have considered adding debtor finance to your armoury. However, Ballast CEO Frank Paratore says that the more you can offer your clients, the better off your business will be.

“Brokers who integrate other services and look at the bigger finance picture will provide a better relationship solution to their customers,” Mr Paratore says. “It will help brokers to transition from being transaction-based to being relationship-focused.

“That doesn’t mean brokers have to be the person that provides every service – not at all. What we’re asking them to do is be the conduit and the point of contact between the services.

“By doing that, you’re providing a better relationship to your customer. You’re locking them in, you’re protecting your trail and you’ll be making a better margin. It’s a more profitable business model.”

Mr Paratore believes that if brokers decide not to take this path, they may find their clients going elsewhere.

“What they’re missing by doing that is [that] someone else is going to do it for them,” he says.

This report

In The Adviser’s first comprehensive report on debtor finance, we will look at the opportunities that exist for brokers. Those brokers who deal extensively in the commercial finance market are particularly well-positioned to take advantage of debtor finance.

Every broker, however, can tap into this market and offer more to their clients.

The report will also examine in detail the target market: who needs debtor finance? Which of your existing clients may already have one of these arrangements in place? How can you find, and target, clients who need a debtor finance product?

In order to effectively tap into this market, brokers would do well to understand how the market and the products and lenders in this space work. This report’s product showcase will act as a starting point for brokers, familiarising them with the structure of the loans.

We will conclude with a look at the bigger picture – how debtor finance fits into the wider third party distribution channel and the role it plays in diversification, commercial broking and the business lending sector.

A number of brokers and businesses who have successfully integrated a debtor finance offering into their business will also give their top tips and insights into how it works and how it has benefited their client base and bottom line.