With an increasing number of brokers open to adding debtor finance to their product mix, one of the most common questions we get from brokers is, “how do I know if it will suit a client?”
As in all client interactions, no matter what industry they are in, communication is the key. The ability to sit down and talk to a client about how their business is going, and recognising their pain points, puts brokers in a good position to assist.
1 - Client reluctant to, or can’t, put up property as security
Overdrafts rely on personal or commercial property being put up as security. Debtor finance (also known as invoice finance) allows the client to avoid putting real estate at risk by using the value of outstanding sales invoices to secure finance. It also means that a broker can use these personal real estate assets for other wealth-creating options for the client.
2 - Funds are needed — yesterday!
Unlike traditional bank finance, debtor finance can be approved and put in place within weeks (often within days). For brokers with clients in urgent need of action, or who are too busy to spend months seeking funds only for a bank to say no, this can be the perfect opportunity to quickly implement growth plans.
3 - Outgrown bank funding limits
If your clients are turning down growth opportunities because they’ve exceeded existing funding lines, debtor finance ensures that funding is increased in line with sales growth.
4 - No trading history
One of the chief complaints of start-ups is that no matter how good their business idea is, traditional modes of funding require a year or more of trading history to qualify for funding. Debtor finance is based on the value of receivables, making it an excellent option for new businesses that have increasing sales and a great order pipeline.
5 - Rapid growth
Costs associated with increased sales create cash flow issues that, if not managed, can be a business killer. Debtor finance is linked to sales, closely tying the working capital available with a business’ cash requirements. This can help sustain growth rates and ensure that clients are not turning down growth opportunities because they can’t fund them.
6 - MBO and acquisition ambitions
A debtor finance facility can provide an employee with the financial power to buy out the existing owners. Similarly, if a client is looking to purchase a competitor, debtor finance can raise funding against receivables, providing extra liquidity and a reliable cash flow while the new business is integrated.
7 - Seasonal ups and downs
If your client operates in a seasonal business, they must ensure that cash availability matches with demand during peak periods and that cash can be brought forward during the slower times when debtor days might stretch out and cause working capital issues. Debtor finance smooths out cash flow peaks and troughs, so your clients can pay wages and essential bills during quieter work times.
8 - Succession planning
If the incoming owner of a family or small business doesn’t have enough equity to access finance, using debtor finance means that the business can be funded by its own assets. The working capital boost means that the new owner has some time to find their feet.
9 - Change in trading conditions
Keeping close to your clients, you will know if they have lost a major customer or had a large customer extend trading terms. Rather than be exposed to serious liquidity issues, the business can put in place an invoice finance facility to provide breathing space while turnaround strategies are put in place. This works well with clients experiencing trouble paying their tax bill, but with enough future orders to remain viable.
10 - Import/export opportunities
An increasing number of Australian business owners are testing the global market and trying their hand at import and export. Debtor finance, and more specifically trade finance, can help fund the next shipment, with 24-hour availability of drawdowns to help your clients lock in favourable exchange rates. For an importer, it guarantees funding to pay suppliers, and for an exporter, it offers working capital so the business can trade comfortably until the customer pays for the goods or services.
11 - When a marriage ends, the business doesn’t need to
Debtor finance offers your clients the opportunity for business funding to be linked purely to business assets, rather than linked to personal property that may be involved in divorce settlements.
12 - High wage or expense bills
Businesses in labour hire and transport, for example, can have significant wage or expense bills to pay weekly, but their clients may be paying on 60- to 90-day terms. Debtor finance can ensure that wages and expense bills get paid weekly to keep things rolling until invoices are paid.
Wayne Smith is head of debtor finance at Scottish Pacific Business Finance, part of the Scottish Pacific Group.
The company is the largest specialist provider of working capital solutions for SMEs in Australia and New Zealand, with more than 1,700 clients using their broad range of trade and debtor finance solutions.
Wayne has three decades of experience supporting small to medium businesses with their working capital requirements, working in senior debtor finance and banking roles in Australia and the United Kingdom.
He has worked with thousands of brokers in Australia and the UK during his career, and is well known for his ability to simplify complex financial products and advise on ways to identify opportunities.
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