Debtor financing – an option worth considering

There is little doubt that the financial landscape has changed as a result the lingering global financial crisis, particularly as businesses are finding it difficult to secure financing from traditional sources such as the big banks to assist with cash flow shortages.

A Senate inquiry into the ability of SMEs to access finance kicked off this year after an
increasing number of small businesses have complained about the lack of access to financing.

On top of this, there is concern about the knock-on effect the proposed Resources Super Profit Tax will have on small businesses supplying the mining industry from 2012.

Conditions remain tough for Australian SMEs, and despite some positive signs emerging from the economy, there are still many hidden hurdles for SMEs including defaults, rising insolvencies, late debtor payments, tightening supplier terms, reduced support from the Government’s economic stimulus and rising interest rates.

As a result businesses are increasingly turning to debtor financing as a way to improve
cash flow and increase the working capital available to them.

What is debt financing?
Also known as invoice financing, debtor financing is a flexible funding solution for small,
medium and large businesses, designed to improve cash flow by releasing cash locked up in unpaid invoices.

It converts typically up to 80 per cent of the value of each sales invoice into cash usually within 24 hours. Once payment has been received on the invoice the remaining 20 per cent, less a service fee, is returned to the client. It is an effective way to increase cash flow, providing funding for the cash gap between invoicing and payment.

For small businesses it usually provides an optional sales ledger management service, issuing statements, handling cash allocations, collecting outstanding payments and maintaining detailed accounts of the business’ transactions. This helps free management time to focus on moving the business forward.

Larger businesses with accounts receivable areas typically use invoice discounting, a funding-only form of debtor financing where the business continues to manage the sales ledger and collection of accounts. The facilities are also often confidential, in that debtors are unaware of the involvement of a third party financier.

What are the benefits of debtor financing?
The benefits of debtor financing are extensive – from maintaining a healthy cash flow to funding growth, it is extremely beneficial when credit finance is difficult to raise.

A range of companies use debtor financing, but those that supply goods on credit, and those with large labour costs are the ones that benefit most from it. These include manufacturing, importing/wholesaling, recruitment/labour hire, printing and related services, transport, commercial cleaning, and clothing/textiles.

Often, receiving advances against their outstanding invoices provides the additional working capital to manage the peaks and troughs in demand, but also provides the flexible source of cash, which can be used to access supplier discounts. Because the funding is typically linked with the business’ sales, the limits are free to grow in line with the business, overcoming the inflexibilities commonly encountered with traditional overdraft financing.

Turning to invoice financing helped Australian company Portland Marketing boost its cash flow and grow its presence in the local skincare market in the aftermath of the economic downturn.

Portland Marketing manufactures and markets Oscar Natural Shaving Oil, an all-natural
shaving alternative to foams and gels.

Director of Portland Marketing, Oscar de Vries, who is keen to grow the Oscar shaving range in Australia across a number of major retailers, found adequate cash flow was a major constraint for expanding the business.

With banks reluctant to lend, Mr de Vries turned to Bibby Financial Services, using its invoice financing facility to assist Portland Marketing’s cashflow.

“It is very tough to break into national retailers and it’s only been the support of a few private investors and of Bibby Financial Services which enabled the business to get off the ground, Mr de Vries said.

“I know from past experience that banks are just not interested in a business such as ours unless you pledge the family property, he said. “It was refreshing that Bibby was prepared to take the time to meet me, discuss my business plans and understand my strategic thinking and growth plans.”

* Greg Charlwood is Managing Director of Bibby Financial Services Australia, the largest global specialist provider of factoring and invoice discounting services for small and medium sized businesses, currently providing cash flow funding for nearly 4,500 businesses worldwide.