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Is debtor finance right for your business?

Despite the potentially unfavourable connotations associated with the term “Debtor Finance,” its positive impact on business operations is evident, as highlighted by Moneytech.

While the term “debt” may raise concerns, this leading non-bank business lender recognizes debtor finance as a valuable tool utilized by astute and financially stable businesses to enhance their cash flow.

In the realm of debtor finance, larger SMEs with a turnover exceeding $1 million tend to leverage this financial resource to fuel general business growth. In contrast, smaller SMEs more commonly seek debtor finance to maintain their day-to-day cash flow. Both applications of this financial tool are valid, yet Moneytech strongly encourages SMEs, especially those edging closer to the $1 million turnover mark, to consider using debtor finance products to unlock and maximize their business growth opportunities.

Numerous businesses encounter difficulties in expanding their operations because a significant portion of their cash remains tied up in unpaid invoices. When these invoices are eventually settled, the funds are typically allocated to salaries, supplier payments, and other essential business expenses. Debtor finance alleviates this challenge by promptly releasing the full value of customer invoices, well before their due dates. This facility can be used to meet supplier payments, thereby avoiding late payment fees and covering internal expenses. Notably, enhanced cash flow serves as a critical catalyst for strategic business growth.

Mark Cameron, Chief Business Officer at Moneytech, underscores the transformative potential of debtor finance in Australian businesses. He asserts, “Debtor finance facilities help Australian businesses free up their cash flow, but how businesses use improved cash flow can be the difference between growth, rather than simply ensuring survival.” While maintaining cash flow is the primary application of debtor finance, a productivity commission report identifies general business growth as the fourth reason for engaging in debtor finance. Whether directly or indirectly, the improved cash flow derived from debtor finance can pave the way for business growth through activities such as expanding revenue streams, securing raw materials at competitive prices, or facilitating mergers and acquisitions.

Moneytech acknowledges a business’s invoices as its most valuable asset and offers its Debtor Finance solution, allowing clients to access up to 100% of their customer invoices as soon as they are generated, thus eliminating the need to wait 30, 60, or 90 days for payment. This debtor finance facility, set up with PAYG (Pay-As-You-Go) terms, does not require property security, providing an additional layer of flexibility for businesses.

Mark Cameron also provides a succinct overview of the financial and operational considerations that businesses should evaluate before opting for Debtor Finance:

Current Payment Terms: Ensure that existing payment terms with debtors are transparent and mutually agreed upon.

Finance Terms and Conditions: Fully comprehend the terms and conditions of the applied finance, including interest rates.

Intended Use of Finance: Clearly articulate how the finance will be employed, emphasizing the identification of strategic opportunities to ensure that objectives are met and that improved cash flow leads to the desired outcomes.

Debtor Finance for Accelerated Growth

A debtor finance facility can be applied to any purpose that a business would typically allocate its income to, be it wages, supplier payments, business development, or acquiring new ventures. Depending on the industry, business development may necessitate substantial capital investments to seize emerging opportunities. For instance, in the mining industry, the cost of business development includes recruiting skilled expert teams and providing them with the necessary tools to execute proposed projects. An experienced operator in the mining sector had recently established a new business, which had been trading for a few months and urgently required financing to capitalize on new opportunities and manage its cash flow.

Securing financing was not straightforward for this client, who faced several challenges, including a brief trading history and a limited ledger spread with just two active clients. Furthermore, rapid growth was anticipated based on the client’s project pipeline, with urgent project delivery timeframes. To pursue these business development opportunities, a high advance rate was imperative.

In response to these challenges, Moneytech extended a $1.8 million Debtor Finance Facility with an 88% advance rate. Importantly, this facility aligned with the client’s objective of expanding the business without requiring real estate security, committing to long-term contracts, or incurring early termination fees.

Moreover, Moneytech accommodated a 100% concentration on the two debtors involved. Impressively, from the initial inquiry to settlement, the facility was processed in just over two weeks, enabling the mining business to swiftly expand its operations and serve new clients.

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