Many headwinds are facing the Australian economy right now, with few signs of abating anytime soon. Australia has entered a recession, COVID-19 just won’t go away, and uncertainty around the future remains as high as ever. As we covered last week, small businesses are bearing much of the brunt, with operating restrictions, border-closures and late-paying customers impacting their ability to bounce back. Fortunately, the Government has announced extensions to key support measures such as JobKeeper and JobSeeker, providing some relief to employers and supporting consumer demand. Nonetheless, if your business has already tapped the Government SME Loan Guarantee Scheme and is looking for further working capital support to grow, you may benefit significantly from an alternative financing solution – debtor finance.
How does debtor finance work?
If your company sells goods or services on credit terms by issuing an invoice to your customers, then you may be a candidate for debtor finance. Debtor finance bridges the cash flow gap between when you make the sale and when you are paid. Typical payment terms range from thirty to ninety days, leaving a long period between revenue recognition and cash in your bank account. Cash is what pays the bills and allows your business to take advantage of growth opportunities, not revenue. “Debtor finance ‘unlocks’ the cash tied up in your accounts receivables ledger” Debtor finance is an advance on the money owed from your outstanding invoices – effectively ‘unlocking’ the cash tied up in your accounts receivables ledger. Financiers will pay your business up to 95% of the verified outstanding invoice value, often within 24 hours. When your customer pays, they will remit the remaining amount, minus a small fee to facilitate the early funding. Your business can then use this cash immediately to secure new customers, invest in the latest opportunities and sure-up your financial position.
Why you would use debtor finance over a business loan
There are many reasons a small business might choose a debtor finance facility over, or in addition to, a traditional business loan or bank overdraft. Whether your business is looking to get through difficult times or continue to grow, debtor finance has its advantages, including:
- Fast, scalable access to working capital. If your business is going from strength to strength, a fixed business loan may not be able to keep up. Debtor finance is far more flexible, allowing you to access the necessary working capital much sooner than you would have been able to otherwise. As your sales increase, so does your invoice ledger. In turn, this immediately expands the pool of funds you can draw on. Alternatively, business loans or overdrafts are often secured by fixed assets or limited to past sales, not reflecting the current state of your operations.
- Compensate for late-paying customers. NAB’s recently released ‘Supporting Economic Recovery’ found that 53% of invoices due to small to medium enterprises (SMEs) are not being paid on time. SMEs faced almost $115 billion in late payments in the past year – denying them more than $7 billion in working capital. While not a solution in itself, debtor finance goes a long way to alleviate the cash flow pressures felt from late-paying customers by providing upfront access to due funds.
- Better credit control and processes. Debtor finance often encourages better credit control behaviours across a business. With the knowledge that you are bound to the specific requirements of your financier and that your funding relies on it, you will be incentivised to optimise your accounts receivable processes. Ensure invoices are sent out on time (and error-free), collections are monitored effectively, and all your paperwork and financial statements are in order. This may indirectly benefit your business in ways that a simple loan will not.
Industries best suited for debtor finance
Some industries naturally find themselves a better fit to extract the benefits of debtor finance as a primary financing solution. Businesses in sectors that have extended lead times between their initial input purchases and the eventual sale to a customer are best suited to this type of funding. Typical industries where this is the case include transport, wholesalers labour-hire and manufacturers.
Use a debtor finance broker to secure the best deal
The benefits of a great business finance broker are well known. Debtor finance brokers are experts in what they do, understanding the product and different financiers inside and out. Using this experience they are able to source the most appropriate deal for your company’s unique circumstances. They have your best interests at heart and possess the skills to represent your business favourably, negotiating with finance providers on your behalf. Debtor finance brokers stay up-to-date on changes in the lending market and are available whenever you need them.
Need further assistance or advice? Get in touch
Whether you’re looking to sure-up your cash flow, take your business to the next level, an experienced finance broker is your best point of call to discuss the debtor finance options available. The team at Capital Plus Finance will do everything we can to help you secure a suitable finance solution for your small to medium business. Please give us a call anytime to find out more or to have an obligation-free chat about your business’s funding situation.