In my experience, there are a number of different reasons why business owners may be reluctant to give debtor finance a try.
It could be a lack of awareness, the potential for disclosure to their customers, or fear of the unknown.
In terms of lack of awareness, it is incumbent upon those that advise business owners, including finance brokers, to be totally aware of what options the business owner has and which options are best suited to that business.
In terms of disclosure, I sometimes wish business owners knew more about their customers – if they did, they wouldn’t have any reservations about their customers knowing they are using debtor finance.
I remember a prospect once asking me what would his customer think if he used debtor finance? I told him to ask his large American company customer. Their response was “We think it’s great. We’ve been using it for years.”
At Scottish Pacific, we have more than 60,000 debtors who pay us for our various clients’ invoices, and amongst these debtors are some of Australia’s largest companies.
On rare occasions, I’ve seen price raised as an issue. In these situations, sometimes a business owner will obtain cheaper funding by putting his house on the line to secure a business facility. While I can’t disagree that this would be cheaper, it doesn’t make sense.
Any additional cost could be classed as the price to protect the house for all those that live in it. In addition, the equity in an unencumbered house could be used to make further investments to help with estate planning rather than supporting the business.
Why would people risk the roof over their head so their business can save a few thousand tax-deductible dollars?
And finally, we come to fear of the unknown. Here, we are lucky that invoice finance has evolved and there is an easy way to help overcome any fear of the unknown.
A number of providers now offer selective invoice finance. This is where the business can select which invoices they use for funding and which they don’t. This can be attractive for a number of reasons:
• businesses don't want to be tied to a minimum contract period
• they would rather not commit to submitting every invoice for funding
• the need is very short term and a one-off.
Brokers who are not overly familiar with debtor finance can have the same reservations, making them hesitant about recommending this type of funding.
This is one of the reasons why we have seen the rising popularity of selective invoice finance, which has developed into a market worth an estimated $150 million over the past five years.
It’s a market that continues to grow. The market was serviced initially by franchise operations, joined more recently by peer-to-peer lenders and just recently by Scottish Pacific.
Selective invoice finance is the most flexible invoice finance option in Australia.
In a nutshell, it offers small to medium-sized businesses a line of credit secured by one or more outstanding sales invoices.
It’s an ideal solution for businesses with seasonal fluctuations in their trading cycles, which can have a significant impact on their cash flow, particularly during the busy periods.
The solution works for these businesses because selective invoice finance is easy to access, with most providers typically offering come-and-go facilities with 24-hour approvals, no minimum period, no minimum fees and no obligation to submit more than one invoice for funding.
For brokers and advisers, selective invoice finance, in addition to generating commission on an invoice-by-invoice basis, also offers the chance to ‘dip a toe in the water’ to find out more about receivables-based finance as a funding solution for their clients.
Given the flexibility of this funding option, I’d expect brokers will be strong supporters of selective invoice finance as it continues to increase in popularity.