Debtor finance is one revenue stream that seems to have gone unnoticed by most mortgage brokers. The Adviser shines a light on a unique and potentially lucrative sector
Cash flow problems plague many businesses – particularly the small to medium-sized ones – holding them back from new opportunities. Owners are often keen to expand their business when things are going well, but this is impossible to do without cash reserves. That’s where debtor finance comes into play.
Put simply, debtor finance is a financing facility that assists businesses in managing their cash-flow requirements based on the value of their accounts receivable ledger.
The major benefit of debtor finance is that it can help businesses unlock cash tied up in their debtors so they can increase revenue and grow.
Scottish Pacific chief executive Peter Langham says current demand for debtor finance is high and that brokers need to be aware of this.
“Tell me a small business that isn’t looking for additional working capital or additional facilities, or isn’t happy with their bankers,” he says.
“We receive close to 200 new business inquiries a month just on debtor finance, and as a company, we’re growing at 20 to 25 per cent, which tells us there’s a demand for our products and services.”
Mr Langham adds that a majority of Scottish Pacific’s business involving debtor finance comes from brokers.
“We’ve established long, solid relationships with many finance brokers, and we’re always on the lookout for new ones all the time,” he says.
Neil McKay, chief executive of SME Finance Group, adds that the growing demand for debtor finance creates a golden opportunity for brokers.
“We’ve got examples of where the banks have neglected SME businesses that really do have a need for this product, and what they will do is sell a mortgage-based product and tie up all of their security, so I think the broker can bring to the table some alternative solutions for the customer,” he explains. “It’s a customer friendly product, and the debtor finance space will continue to grow.”
Pros and cons
The obvious benefits that debtor finance provides brokers are another revenue stream and an expanded product range, in turn attracting new clients that the brokers wouldn’t usually be talking to, Mr Langham says.
“Debtor finance provides working capital for businesses to grow, and if these businesses are growing, they’ll need things such as new premises or a new piece of machinery,” he says. “If the broker maintains the relationship with these clients, then they will continually grow their business over time as their clients grow.”
However, according to Mr Langham, one common misconception that brokers have of debtor finance is that it is expensive and difficult.
“Is it expensive? Well, it’s usually cheaper than an unsecured overdraft, if you can actually get one,” he says. “And in terms of difficulty, it’s not difficult at all – it really is a simple process to go through and administer.”
The real challenge for brokers is finding a provider that will best suit their existing and potential clients.
Indefin co-owner and broker Chris Matthews believes that offering debtor finance allows brokers to provide a solution they might not have otherwise thought of or found.
“If you’re aware that debtor finance is a possibility, then it may well be the difference between solving your client’s problem and earning additional income, and not being able to do anything at all,” he says.
Mr Matthews says the only concern regarding debtor finance is that a broker might offer it as a potential funding solution when it is not the most appropriate.
“Ultimately, they’re doing their client a disservice by getting the wrong type of finance – it might not be an immediate disadvantage to them or their client, but ultimately it will become apparent.
“A good example is if a broker tried to fund a long-term capital item with debtor finance – it can work, but it doesn’t necessarily always work, as you’re funding a long-term capital purpose [with] what is essentially short-term capital debt,” he says.
Guidance and support
So if you’re keen to introduce debtor finance to your business, how do you go about it?
Mr Langham says brokers don’t require accreditation; all they really have to do is refer their client to their provider and they will take care of the rest.
“Unlike equipment finance, where the financier relies on information given to them by the broker, debtor finance providers will do all the due diligence,” he explains.
Brokers need to be proactive about identifying opportunities and finding out whether their clients’ businesses have receivables – or debtors – that can be turned into cash, Mr Langham says.
“From that point, talk to a debtor finance provider, outline your client’s situation, and find out whether or not debtor finance would suit them,” he says.
“If the provider agrees that the client is a potential user of debtor finance, you can go back to the client and say, ‘Look, you’ve got these assets sitting on your balance sheet – debtor finance can turn that into cash’.”
This can release working capital for the client so they can grow their business further, and even release their house from the clutches of the bank if it is being held as security, he says.
“If that’s the case, the client can release the house and use the equity of it to maybe buy another house, so you’re actually increasing their buying power within their own security rather than tying it up in the business,” he says.
Mr Langham says Scottish Pacific has more than 20 years’ experience in supporting brokers who offer debtor finance, and provides them with information on its benefits as well as case studies and success stories. Scottish Pacific also provides information about debtor finance that brokers can use under their own name as educational material for their clients, he adds.
Mark Cleaver, managing director of Bibby Financial Services in Australia and New Zealand, says one of the top requirements for an SME is flexibility, so they need a financier that can react quickly to their needs.
“As Bibby is an SME itself, we understand the importance of speed, flexibility and access to decision-makers when it comes to a broker choosing a lender,” he says. “You generally find that banks move quite slowly when it comes to providing debtor finance.
“Brokers are heavily invested in relationships and act very much as a problem solver, and we find that SMEs who come to us are looking for a trusted adviser with an effective solution to their problem. We endeavour to provide exactly that and reassure the broker and the client that when strings need to be pulled, we can deliver,” Mr Cleaver says.
When introducing brokers to the business, Bibby hosts educational seminars on its products and outlines the different circumstances when debtor finance is appropriate. The seminars also give brokers an insight into the key criteria that helps form the company’s decision-making when it comes to offering debtor finance.
“Because we have invested in expanding our branch network in Australia, we can offer these seminars on a local basis,” he says. “Our brokers are served equally across each state that we operate in.”
“We also send out a monthly e-newsletter to our introducers that highlights the recent deals we’ve made in regards to debtor finance, as well as any new solutions that we’ve come up with. And if they have a query, they have a designated BDM which they can go to for help.”
Who does it suit?
Mr Langham says debtor finance is best suited to B2B companies that deal with goods or services, such as transport businesses, labour hire businesses, importers and manufacturers.
Scottish Pacific can help brokers mine their existing client base for potential debtor finance targets.
“If brokers are targeting a specific industry, they need to find out which companies they need to talk to, and then they can give them a call and make them an offer,” he explains.
Steve Keefe, broker and director of Dirigo Group, generally finds his clients by analysing their financial statements and working out whether someone has a cash-flow issue.
“We have a checklist of 10 key indicators as to why a business may have cash-flow issues,” he says. “Generally, when we’re in the course of a conversation talking to a business owner, we’ll tailor our questioning around some of those key indicators, and if we get a negative response to those, then that suggests their business has cash-flow problems. Then we look at the debtors and see whether it’s an opportunity for them.”
Learn before you offer
Mr Matthews says it is important to note that offering debtor finance is very different from offering a home loan, and suggests that those who are inexperienced should go about it in a consultative fashion.
“Learn all about the product, as well as how to craft and present a solution to offer clients, by seeking the advice of somebody who does have the experience. I’d do that with your first few transactions to build your confidence up. For most brokers and advisers, the most important thing is their reputation, and [that] can come undone very quickly if they mess up a transaction or make it a bad experience.”
Angus Sedgwick, CEO of The Invoice Market, explains his business’ point of difference, and how brokers can benefit from offering its services.
1. What is The Invoice Market?
The Invoice Market (TIM) is an innovative peer-to-peer invoice funding platform which provides single invoice funding to Australian businesses. TIM sources capital from a panel of approved funders that include SMSFs, high-net-worth investors, family offices and institutional fund managers. TIM’s role is the origination of invoice funding opportunities, gathering of the due diligence requirements required to assess the transaction, presenting that funding opportunity to our panel of funders and managing and reporting each funding transaction.
2. How is your business model different from other debtor finance specialists?
The Invoice Market provides what is known as cash-flow funding. In a general sense, cash-flow funding is defined as obtaining cash against the value of your unpaid invoices – however, within that very generic space, there are distinct product differences.
Spot or single-invoice factoring – which is what TIM specialises in – does not contract the client to factor their entire debtor book. They can pick which invoice/s, which debtor and when they would like to sell an invoice to raise funding. The transaction is the sale of an asset (the unpaid invoice) at a discount to the value of the asset (the discount fee paid to the funder). Spot-factoring clients tend to be SMEs that are more newly established and maybe not yet profitable, running an ATO tax debt payment plan or experiencing other issues that would immediately make them unable to meet the criteria of the banks or the second-tier players. Or they may be businesses that meet the bank approval criteria but do not want to be locked into a 12-month whole-of-turnover facility.
The Invoice Market funding model is unique in that we source funds from a panel of approved funders – therefore, one funder may decline to fund a deal, yet another funder may take it on. We are therefore a very flexible provider of invoice funding and not bound by strict risk assessment criteria.
3. How does your service help brokers who are offering debtor finance, and in particular, invoice funding? How will it help their clients?
Many SMEs are unable to obtain traditional debt finance, whether that be an overdraft, business loan or debtor finance, as they may not meet the strict lending criteria imposed by traditional financiers. The flexibility offered by TIM is a great advantage, as we can cater to all types of businesses, business structures and across industries that many traditional funders will decline, including construction. This allows brokers to offer our services to their business clients with a higher degree of confidence.
Also, single-invoice funding allows the client to use our service for a short period of time – even once-off – rather than being locked into a 12- to 18-month contract that may not suit their business growth.
4. Has there been much interest from brokers wanting to use your service?
Yes, there has been a high level of interest from brokers, particularly the commercial finance brokers. Having said that, mortgage brokers are increasingly looking at this space [since] although they deal with consumer loans, many of their consumer clients are business owners.
The Invoice Market pays an upfront commission of 70 basis points of invoice value for the first $500,000 of invoices funded, and a trail commission of 35 basis points of invoice value thereafter for as long as that client funds with TIM. This allows the broker to build a book as they do with other finance products that will continue to pay them income after referring a client to TIM.
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