The focus of this blog is to help brokers identify the industry sectors and business situations for which debtor finance 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 who 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 forgoing 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 a lot 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 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.”
Start-ups, turnarounds and borrowing restructures
Start-ups often have limited funding options beyond remortgaging or asking friends and family to invest, as traditional forms of finance rely heavily on past performance rather than future prospects.
Debtor financiers are much more interested in a business’ future than its history. A start-up in a suitable industry, with a sound business plan, will find it easy to access a debtor finance facility, which will enable the business to establish itself by generating the cash flow to fund staff, stock or capital expenditure.
There are other business situations, including turnaround for businesses with a sound rescue plan, and divorce situations involving a business that has borrowings secured by shared real estate that may have to be sold or transferred as part of the settlement.
Debtor finance can also help business owners who no longer want to use the family home to support business borrowings. In most cases, the funding available will be greater, bringing the added bonus of the business supporting itself and freeing up the family home to support other opportunities such as investment property acquisition.
With any debtor finance referral, brokers can choose the extent to which they want to be involved in a deal. Some like to meet the debtor financier with their client and take an active role in compiling supporting information, while others prefer just to pass on a name and number with a bit of background detail. Most debtor financiers are entirely comfortable with either scenario.
The important role brokers can play in making SME clients aware of this funding option cannot be understated. The Scottish Pacific SME Growth Index, which surveyed more than 1,200 SMEs with turnover of $1 million to 20 million, found that 77 per cent of growth businesses used personal assets to fund business growth.
Many SMEs seem unaware of funding options beyond the traditional secured overdraft, leaving the way open for brokers to bring smart, new business funding options to the table for their clients.