As more brokers become aware of the opportunities that debtor finance can offer their clients, it’s important for the industry to support them, writes Peter Langham
As debtor finance becomes an increasingly prominent revenue option for brokers, it is important that they can identify the industry sectors and business situations for which it represents an ideal funding solution. Finance brokers who understand the offering and which clients it will suit can benefit both by deepening their client relationships and growing their own revenue streams via trailing commissions.
Here’s an overview of the types of client that would most benefit from debtor finance:
Industries to keep on your radar
The biggest users of debtor finance – because it suits their business model – are SMEs and start-ups in temporary labour hire, recruitment, transport, manufacturing, wholesale/distribution, printing and business services.
Debtor finance is for businesses that sell products or services to other businesses on standard trade credit terms, funding business growth and expansion.
It is an ideal solution for businesses that are turning away orders and foregoing growth opportunities because they can’t fund them. Some specialist debtor financiers also offer trade finance, which is an ideal cash flow accelerator for importers, helping meet the costs of bringing a product into the country.
High-growth businesses have much to gain
Debtor finance is ideal for growing businesses, providing the capital required to fund growth. A great example is Australian SME Ribs & Roast, a national steakhouse supplier that also has retail lines with many large national supermarkets. Two years ago, the business was struggling to keep up with orders as demand was outstripping capacity at their Sydney factory.
According to Ribs & Roast’s general manager, Ryan O’Shea, debtor finance allowed the business to cope during a period of great growth (50 to 60 per cent growth month-on-month).
“Our broker recommended debtor finance as the most effective way to fund the growth we were experiencing, and the facility allowed us peace of mind around cash flow while we transitioned to a bigger factory,” he says.
As the business grows, the debtor finance facility (unlike a typical business overdraft) automatically grows with it. Debtor finance is one of the few forms of finance with this flexibility.
A great option to fund M&A or MBO activity
Watch out for clients considering a merger/acquisition or management buyout or buy-in. The receivables ledger of the target business can be used in a debtor finance facility to generate funds to contribute towards the purchase price and provide ongoing working capital.
For games distributor Five Star Games – a company launched by the local management of Sega Australia – debtor finance was used to complete an MBO of Sega Australia and acquire the distribution rights for Sega products.
The potential new owners had minimal capital, and Sega wanted to be assured of getting paid. Debtor finance helped Five Star Games management win the rights, secure the first shipments and make stock purchases.
Darren Macbeth, managing director at Five Star Games, says it was a godsend. “It’s been a great way to free up cash flow. We were looking to finance $2 million [worth of] purchases and the banks wouldn’t touch it. Debtor finance was a great way to finance our growth without tying up our house.”
Peter Langham is chief executive of national working capital solutions specialist Scottish Pacific Business Finance, which handles more than $10 billion of invoices each year, providing funding lines exceeding $800 million. Originally training as an accountant, Peter has more than 30 years’ experience in the debtor finance industry. He has overseen significant growth at Scottish Pacific, which has consistently outperformed the market over the past five years. Scottish Pacific was named by brokers as Best Cash Flow Lender in The Adviser's Non-Bank Lending Awards for 2014, 2015 and 2016. The group was also named Best Trade Finance Provider at the Trade Finance Global Excellence Awards 2015.
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