Compared with other industrialised nations, Australian SMEs are not regular users of debtor finance. Given that SMEs commonly cite cash flow challenges as major impediment to growing their business, it is timely that we explore debtor finance as a mechanism to improve your working capital.
Mark Harper, Executive Manager of Business Lending Products at Suncorp explains the benefits of debtor finance.
Debtor Finance provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cash flow. It is generally only available to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders.
Financiers will usually advance up to 80% of the invoice value, and credit your bank account within 24 hours of presentment. In most cases, the SME will continue to collect the debt, with the debtor instructed on the invoice to pay into the SME's nominated bank account which is controlled by the financier. The SME receives the balance after a small management fee is deducted by the financier. Interest also applies on the loan amount.
Most debtor finance facilities don't require real property collateral - the financier relies upon the value of the debtor's ledger of the SME as its security. With more and more SMEs unable or unwilling to pledge real property as collateral, this can be a great way of unlocking cash within your business.
Whilst cash flow and ample working capital is critical to the health of any SME, debtor finance may not be suitable for all SMEs effecting sales on credit terms to other businesses. SMEs need to factor in the extra cost associated with debtor finance - financiers need you to have robust accounting and credit control systems in place - if you don't, you may need to improve this part of your operations. Also, as financiers have a greater level of administration associated with reconciling your debtor's ledger, the costs compared with traditional bank finance can be higher.
The big benefit of debtor finance is that you can build the cost of debtor finance into your profit margin, and match your income and expenses on a sale by sale basis.
Just remember though, if your debtor fails to pay, you are liable to pay back the financier for any funds they have lent you against the invoice, plus costs.