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Debtor finance has boomed over the last decade and significant opportunities exist for brokers to participate in this rapidly growing industry.
Total debtor finance turnover in the June 2014 quarter was $14.9 billion and the industry is today worth five per cent of Australia's gross domestic product.
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There are three important reasons why finance brokers should be considering debtor finance as a lending option for businesses.
Firstly, the finance landscape has changed and businesses are finding it difficult to rely on banks for financing. Secondly, as a result of subdued economic conditions, many businesses have encountered cash flow shortages significantly impacting their operations and growth opportunities.
And thirdly, businesses increasingly don't want to risk personal property to secure finance.
Importantly, finance brokers play a crucial role in educating business owners about the benefits of debtor finance to support cash flow.
What is debtor finance?
A debtor finance facility enables small to medium enterprises to quickly convert unpaid invoices into cash, and businesses don’t have to rely on the family home or other property as collateral. Instead, they can leverage their accounts’ receivables, which is typically one of the largest assets on a business’ balance sheet.
Debtor finance converts up to 85 per cent of the value of each sales invoice into cash, usually within 24 hours. Once payment has been received on the invoice, the remaining 15 per cent – less a service fee – is returned to the company.
Additionally, a debtor finance facility can include an optional sales ledger management service that can issue statements on a regular basis, handle cash allocations, collect outstanding payments and maintain detailed accounts of the business’ transactions. This often helps smaller operations to reduce costs and free up management time to focus on strategic issues. Because debtor finance is linked to sales invoices, funding limits typically increase in line with sales growth, making it the ideal funding solution for growth-oriented business owners.
What does a debtor finance opportunity look like for brokers?
Many opportunities exist for brokers to partake in the rapidly growing debtor finance industry and diversify their income streams. Brokers can choose to what extent they are involved with the processing of each debtor finance transaction. Importantly, most debtor finance lenders provide generous upfront and trailing commissions for the life of each deal.
Debtor finance prospects are generally any business selling to other businesses on credit terms (for example 30 days from end of month), which includes a large number of manufacturers, wholesalers and business services providers. Some lenders also offer solutions for businesses servicing or operating in the construction or IT sectors where milestone payments are most common.
Each prospect for debtor finance generally has a need to raise finance for cash flow and growth purposes, but increasingly debtor finance is proving to be a valuable and versatile funding tool for acquisitions, mergers, succession plans and sale of a business, or even in resolving divorce situations or shareholder disputes.
Case study
Sydney-based Traffic Resources is a professional traffic control and project management business. The company has grown quickly over a short period from four employees to over 15, with plans of continuing to increase employee numbers to meet incoming business projects.
Traffic Resources faced two main issues in accessing the funds required to prime the company for its next growth phase. As a predominantly labour-driven business, Traffic Resources was experiencing difficulty managing cash flow and fluctuating company debits. The company also found that despite having a seasoned and successful management team, the company was relatively young and did not have enough trading history to satisfy credit checks required by a number of banks.
Debtor financing allowed the company to access funding without the requirement of real estate security or a lengthy trading history. Debtor finance has provided a steady cash flow to assist with covering day-to-day payments such as staff wages, and importantly provided finance to help grow the business. Traffic Resources is expecting a turnover of close to $1 million in its first year and already has four major debtors using its service. The business forecasts a turnover of between $3-5 million in the 2014/2015 financial year which it can now finance due to debtor finance limits increasing with sales.
