Cash flow finance - Capitalising on borrower cash flow

Also known as invoice finance or invoice discounting or factoring, debtor/cash flow finance is a form of business finance. Basically, debtor finance allows business operators to secure an immediate and efficient cash injection into their business where they would otherwise suffer a lull in cash flow in between trade invoicing and payment.

Unlike more conventional forms of lending, cash flow finance is secured by the invoices themselves, rather than by the business owner's home or other personal assets. This makes debtor finance an ideal lending solution for small to medium-size enterprises as well as for the self-employed.

Looking back a decade, debtor finance in Australia totalled $11 billion. Total debtor finance has since grown to a massive $60.1 billion as of the June 2010 quarter, according to the Institute of Factors and Discounters' research.

The study also revealed 5,366 businesses were using debtor finance facilities across Australia in the June 2010 quarter - up from 4,243 in the June quarter 2005. Usage peaked at 5,956 in the June quarter 2009. This growth alone shows significant opportunities for brokers within the debtor finance sector.

Oxford Funding chief executive officer Rob Lamers has been involved in the debtor/cash flow finance industry since the company's inception in 1994. Forty per cent of Oxford Funding's business is generated through mortgage and finance brokers, he says.

"There are certainly opportunities for brokers in the debtor/cash flow finance sector," he says. "Oxford Funding has assisted many successful businesses with cash flow management, cash flow budgeting and raising capital."

Iwision Finance Group managing director and elite business writer Donald Yum says cash flow finance is an essential part of his business offering. In the 2008-2009 financial year, Mr Yum wrote $2 million in cash flow finance alone.

"A significant number of our clients are self-employed and for this reason, cash flow finance fits within our business offering," he says.

Peel Finance Brokers elite business writer Peter Famlonga agrees. Having written an impressive $2.5 million in the 2008-2009 financial year himself, he says there are significant benefits for brokers who delve into cash flow and debtor finance.

"Cash flow finance has become particularly important in the post-GFC era," he says.

"Since the GFC, cash flow has become king. Emerging businesses are keen to expand and grow through investment but have debts, such as ATO debts, that can hinder their growth and recovery. Cash flow finance helps these businesses emerge and thrive," Mr Famlonga says.

HOW IT WORKS

Debtor/cash flow finance is specifically tailored to businesses that need to sell to other businesses on credit terms. The amount of credit available for businesses seeking debtor/cash flow finance is proportionate to the trade debts due and owing to the business.

Funding is generally available for up to 80 per cent of the business' trade debt amounts, but it can depend on individual circumstances. Once the trade debtor makes payment of the invoice debt, the lender advances the final 20 per cent of the trade debt amount, less a fee.

Brokers who have SME or self-employed clients with business interests in labour, recruitment, transport, and manufacturing are top candidates for debtor/cash flow finance.

To identify eligible applicants, brokers should have a think about those clients with businesses that rely heavily on cash flow.

Take a transport company for example: the main business costs are the lease of the truck, fuel costs, and employee wages. If trade debtors don't pay within the standard credit terms, that can have serious consequences for the business. Cash flow finance can help to avoid those difficulties.

FASTER COMMISSIONS, STICKIER CLIENTS

Brokers who deal within the debtor/cash flow finance sector say one of the main advantages of offering such products is faster trail.

Upon signing the finance agreement, brokers generally receive an upfront commission. Thereafter, they generally receive a monthly trail commission for the life of the facility.

Peel Finance Group's Mr Famlonga says another benefit of offering cash flow finance is repeat business for brokers. Including it in addition to residential mortgages as part of a product offering has actually helped to achieve multi-product selling.

"A client starts off with a need, which may be a cash injection into their business to cover trade debts. Once you conduct a needs analysis you can often help them by providing financial solutions in other areas, such as home loan finance and business equipment or leasing finance. The final result is a multi-product solution," he says.

"It helps to seal the relationship with clients."

SPECIALIST PRODUCT, NON-SPECIALIST OPPORTUNITIES

So, how can brokers break into debtor/cash flow funding?

According to Oxford Funding, an ideal starting point for brokers - apart from looking at their existing client base - is to have a chat with their business referral partners.

Talking with local accountants is always a good way to start. Business advisers can also make good referral partners for debtor/cash flow finance because they exist within the SME space and would therefore be aware of potential candidates for these solutions.

The availability on the market and the suitability of cash flow finance products depend on a borrower's eligibility requirements. Brokers would therefore be well advised to align themselves with a lender that offers a wide range of debtor finance solutions.

The majors currently dominate this market. However, second tier lenders such as Bendigo Bank and Adelaide Bank, as well as non-bank and smaller, private lenders also offer a range of debtor/cash flow finance products.

As the area is highly specialised, it can take some time for novice brokers to develop a full understanding of the intricacies of the sector and the finance products available.

"Brokers who want to advise clients on cash flow finance will need to understand cash flow statements, as well as profit and loss spreadsheets," says Mr Famlonga, who adds that having over 12 years' banking experience has certainly assisted him in understanding and communicating advice to clients within the debtor finance sector.

For novice brokers, an ideal starting point is to become accredited with an associated finance provider, he says: "Brokers who are new to the sector may want to consider seeking guidance from a business development manager (BDM) or accredited provider. A referral partnership would also be a good way to tap into the market."

Despite its highly specialised nature, however, Oxford Funding's Mr Lamers says brokers aren't required to become experts in the field in order to include debtor/cash flow finance in their client service offering.

Oxford Funding provides brokers with direct access to BDMs to discuss loan situations, with brokers able to get involved in the process as much or as little as they choose.

"All we need from the broker is the client's name and number - we can do the rest," he says.

"But if a broker wants to be involved in the client's finance assessment and application, we're happy to facilitate that involvement by keeping the broker updated throughout the process."

CLIENTS MOST SUITED TO DEBTOR/CASH FLOW FINANCE

• LABOUR HIRE - The provision of labour, recruitment and human resource services
• WHOLESALE TRADE - The resale of goods to retailers or other wholesalers
• MANUFACTURING - The manufacturing of products and components
• TRANSPORTING AND STORAGE - Providing storage facilities or transport services including booking, transit and handling
• PRINTING - Supplying print services to businesses on credit terms
• PANEL BEATING - Panel and smash repair shops that have insurance companies as debtors
• AGRICULTURAL - Services including sheep shearing, harvesting and forest protection
• MINING - Services including mineral exploration, development and mining