Debtor finance from the broker's perspective

I thought it would be useful to look at SME funding from the broker’s perspective by asking three businesses – two brokerages and a management consultant with a banking and broking background – why they use debtor finance.

For broker Paul Lambess of CVG Finance in Newcastle, debtor finance is not just a useful product, but a real point of difference that helps him grow his own business along with clients’ businesses.

Paul believes debtor finance offers brokers a great positioning tool.

“So many clients still don’t understand how it works and the broker can come in as expert, providing great advice and an excellent solution for clients,” he says.

“It’s a great opportunity to build closer relationships by offering a genuine solution that allows my clients to grow.

“Finding a debtor finance solution is just a starting point. From there, I can talk about other finance options and it leads to my business winning the client’s home loan, lease finance and other products. It allows my client’s business – and my own – to grow.”

Paul has been a broker for 12 years – the past seven within his own small business, employing five staff.

“From day one in the business I’ve had debtor finance in my product mix, as it’s a great solution for clients – nine times out of 10, bricks and mortar are not required,” he says.

“Growing businesses need cash flow support. With the major banks not supporting small business, specialists such as debtor financiers offer a great solution.”

With a decade of experience as a commercial banker, Steve Keefe, director of finance at the Brisbane-based Dirigo Group, is in a great position to talk about how debtor finance compares to an overdraft in helping SMEs grow.

Dirigo Group is made up of management consultants and finance brokers providing SMEs with business advice around strategy, systems and processes, insurance and finance.

Steve used debtor finance as a banker, but back then it was associated with rescue and turnaround.

“Debtor finance has evolved since those days, and it’s a product I recommend to suitable clients as an overdraft alternative because it is flexible and grows in line with sales,” he says.

“There are requirements SMEs need to meet for financiers, and a debtor finance facility can drive internal processes around extending credit to clients and collections that actually strengthen a business.”

Steve says the most significant negative perception of debtor finance is around price “until we make the client aware of the potential opportunity cost”.

“When we sit down and work out cost per invoice, compared to the cost of not being able to supply more or take on new customers, it paints a much clearer picture for clients of the benefits of debtor finance that you won’t find on a P&L,” he explains.

It’s a similar story for Sydney broker Wade Oldham, who offers debtor finance as a customer solution because it’s a product he believes in.

Wade says that while debtor finance is becoming more popular for fast-growth businesses, he also recommends it when clients need to raise capital within a business to pay out a partner and/or shareholder.

“I’ve also had clients successfully use debtor finance to assist with an acquisition, providing capital so the client can buy another business,” he says.

According to Wade, whose customers are mostly manufacturers, it has taken some education for them to understand and be open to debtor finance, but they soon see the advantages.

“It’s flexible – it is a facility that grows with the client. Some savvy clients reduce their own business costs by using the cash boost provided by debtor finance to obtain discounts from creditors for early payment of invoices,” he says.

From Paul’s perspective, he sees a huge opportunity in the market, with a range of products and different lenders.

“Offering debtor finance is a great way for me to stand out from my competitors,” he says.

“It’s a market where brokers are diversifying, looking for new revenue streams. Unlike some of the new fields such as financial planning, it’s a no-brainer to offer debtor finance because brokers don’t have to start a whole new business.

“Debtor finance is so diverse, but it sits sweetly alongside what we are already doing, so the broker does not have to step into a whole new field with the associated costs and upskilling that comes with a new field.”

Paul says the current lending market means brokers have a massive opportunity off the back of banks becoming harder to deal with and the economic climate, with more and more businesses having to provide longer terms.

“The debtor finance market is competitive and there is more choice for SMEs,” he says.

“Five to 10 years ago, debtor finance was mainly in industries such as transport, recruitment and other niches. These industries are perfect for debtor finance, as it bridges the gap from the time an invoice is issued to when the business gets paid.

“But now it’s opening up, with more players offering debtor finance across different industries and areas.”

Steve says banks offering debtor finance were often generalists, and he prefers to work with specialist debtor financiers such as Scottish Pacific “because they really do want good relationships”.

“They are flexible, we get access to decision-makers and they’ve been doing this for years, so they understand it and have pretty much been through any situation a client could name,” he says.

For Paul, the key thing brokers should look for when partnering with a debtor finance provider is that when they refer a client, the provider is not taking the client – that they will work with you to provide a solution.

“Every broker likes dealing with lenders who respect you as a broker and want to truly partner with you – not just pay you a commission and take your lead. They want you to grow your business too,” he says.

“It helps create a win-win-win situation where it’s not just the financier who is happy, but the broker and the client also get to grow.”

From a lender’s perspective, and as a business that values relationships, that’s what we like to hear!