Any negative connotations surrounding the term ‘Debtor Finance’ bely the positive impact this type of finance has on business operations.
Noting associations with the word ‘debt’ can be seen as unfavourable, Debtor Finance is a product which savvy (and very solvent businesses) use to improve cash flow.
Larger SMEs with a turnover of $1 million-plus are more likely to use Debtor Finance for general business growth with smaller SMEs much more likely to seek finance to maintain cash flow.[i] Both uses of this facility type are equally valid, yet SMEs, especially those with a turnover edging closer to $1 million, can use finance products such as Debtor Finance to maximise business growth opportunities.
Many businesses struggle to grow their business as most of their cash is tied up in raised invoices and when those invoices are paid, income is usually used for wages and paying supplier invoices and other business costs.
Debtor Finance improves business cash flow by realising the full value of a customer’s invoices before they’re due. This facility can be used for paying suppliers to avoid late payment fees or meeting internal costs. Importantly, improved cash flow assists with strategic business growth.
Debtor Finance facilities help Australian businesses free up their cash flow, but how businesses use improved cash flow can be the difference between growth, rather than simply ensuring survival.
The primary use of Debtor Finance, as reflected in a productivity commission report, was for maintaining cash flow, while general business growth was nominated as the fourth reason for engaging debtor finance.[ii]
Directly or indirectly, improved cash flow from Debtor Finance can help realise business growth through such activity as expanding revenue bases, securing raw material at better prices, or completing mergers and acquisitions.
Moneytech recognises a businesses’ invoices as their most valuable asset and Moneytech’s Debtor Finance allows clients to receive up to 100% of their customer invoices as soon as they are raised instead of waiting 30, 60, or 90 days to get them paid. Set up with PAYG terms, a Debtor Finance facility from Moneytech is also supplied with no property security associated it.
The financial and operational considerations a business should review before accessing Debtor Finance.
- Current payment terms: Ensure existing payment terms with debtors are clear and agreed to.
- Finance Ts & Cs: Understand the terms and conditions of the finance being applied for including interest rates.
- How will the finance be used? Articulating exactly how the finance will be used is imperative. Identifying strategic opportunities will help ensure objectives are met and improved cash flow delivers desired outcomes.
Debtor Finance for rapid growth
A Debtor Finance facility can be used by a business on anything it would normally use their income for, from wages and supplier payments to business development and purchasing new businesses.
Depending on the sector, business development can require a significant capital investment to ensure opportunities can be seized. Being ready to employ skilled, expert teams and ensure they have the appropriate tools to deliver any projects pitched for is just one example of the cost of business development.
An experienced operator within the mining industry had established a new business that had been trading for a few months and needed a quick finance solution to be able to capitalise on new opportunities and handle the businesses cash flow.
Seeking finance wasn’t straightforward as the client faced a few challenges including a brief trading history and a low ledger spread with just two active clients. The business also faced internal challenges as rapid growth was expected based on the clients’ pipeline and urgent timeframes for project delivery. A high advance rate was also required to pursue business development opportunities.
Moneytech provided the client with a $1.8 million Debtor Finance Facility at an 88% advance rate. The facility met the client’s objective of being able to have confidence to grow the business without real estate security, lock in contracts or early terminations fees, while Moneytech also provided a concentration to the two debtors of 100%. Responding quickly, the facility went from an initial enquiry to settlement in just over two weeks, allowing the mining business to quickly expand and service new clients.
Mark Cameron is chief business officer at Moneytech.
[i] Small business access to finance: The evolving lending market, https://www.pc.gov.au/research/completed/business-finance/business-finance.pdf
[ii] Small business access to finance: The evolving lending market, https://www.pc.gov.au/research/completed/business-finance/business-finance.pdf