With an uncertain Christmas trading period approaching, business owners should be extra vigilant in managing their working capital and monitoring cash flow, to stay healthy, and avoid both the dangers of overtrading and the traditional cash flow squeeze in the New Year.

Conditions this Christmas are likely to continue to be uncertain, with retail figures remaining weak, a string of major insolvencies, a slight rise in unemployment and the ongoing squeezing of credit and bank overdrafts. Trade payments continue to be well above standard trading terms (almost double) according to Dun and Bradstreet’s trade payments analysis and business insolvencies are still well above pre-GFC levels, in part because of the ATOs reduced tolerance of tax arrears and a general tightening of trade credit from suppliers.

Unless you are an ice cream seller at a beach or a removalist firm, which traditionally have their busiest trading over Christmas and into the new year, it is important to start preparing now to cover costs and maintain strong cash flows when business is traditionally quiet. At this time, the nation goes on leave, accounts staffs are harder to contact, and many businesses are on skeleton staff, so anticipating cash shortages is critical. Without adequate planning now, the business may have to deal with serious issues next year, restricting its ability to benefit when trading does start to pick up after the drought.

Fast growing young businesses are particularly at risk. In the rush to grow, it is often the fundamental business practices – such as getting sound credit control procedures in place – that are left at the bottom of the ‘to do’ list, yet growing companies are the most hungry for cash flow funding. A key risk for such businesses is overtrading, where the cost of financing sales exceeds the working capital available. The problem results in blowouts in payables and receivables, increased financing costs and lower margins, and can be fatal. In such situations the business may need to slow down sales or investigate working capital funding to better align sales with production/fulfilment.

Aside from bolstering processes and procedures, invoicing early and often, and running credit checks periodically, there are a number of funding tools available besides the overdraft, to ensure reliable cash flow in such conditions.

One such option is Debtor Finance, rapidly becoming a key funding tool for Australian SMEs. According the Institute for Factors and Discounters of Australia and New Zealand’s June quarter statistics, over the 12 months to June 2012, debtor finance had helped fund over $62 billion in business to business sales nationally, and although having declined slightly in the immediate aftermath of the GFC, volumes are rebuilding strongly. One such factor is the growing awareness and acceptance of this product by business owners and their advisers.

Debtor Finance allows a business to convert their unpaid invoices into cash quickly, and in essence is a line of credit extended against the business’ receivables, often one of the largest current assets on the balance sheet. In a typical facility, the lender will advance between 60-80% of the face value of the business’ invoice within 24 hours, with the balance returned to the client on payment by the debtor. In some cases the lender also provides an accounts receivable service, helping to save time and accounts receivable cost. The service may also be offered confidentially. Some lenders can also set facilities in only several weeks.

It is also a versatile option, suiting a wide range of businesses and Industry sectors, from small start-ups to established listed/small cap companies, from manufacturers and wholesalers to business service providers. However, generally speaking construction and IT-related services are not generally suited to Debtor Finance.

Debtor Finance is particularly unique in that traditional real estate security is not required a particularly strong advantage in an environment of softening house prices.

Whilst It is somewhat true that debtor finance Is marginally more expensive than other facilities on a straight comparison of interest rates, this ignores the often significant benefits of strong cash flow to the business from more streamlined operations, less reliance on discounts for prompt payment, reduced accounts receivable cost and the ability to take advantage of opportunities quickly.

Benefits of Debtor Finance:

  • Does not require property security, thereby minimising directors risk
  • Funding grows in line with sales, to better match the businesses working capital requirements with availability
  • Reliable cash flows provides the stability and confidence required to implement longer term strategy
  • Less time and resource can be spent on debtor management, to be devoted elsewhere
  • Existing loans can be paid down or extinguished
  • Improved creditor relationships through more prompt payment
  • Often, a higher funding level can be accessed, relative to other products
  • Early settlement discounts can be reduced or withdrawn to improve margins
  • Fast access to capital can allow businesses to take advantage of opportunities quickly, particularly via accessing prompt settlement and bulk discounts e.g. fuel
  • Protects the business against cash flow shocks e.g. directors retiring suddenly, losing major customers, suppliers reducing trade credit, debtor Insolvencies, fires at premises etc.
  • Helps smooth out seasonal peaks and troughs in cash flow
  • Allows competitive terms of trade to be set, without Impacting cash flow
  • Can improve debtor days, with closer receivables management
  • Bad debt can be minimised through more disciplined credit management
  • Useful in capital raisings for mergers and acquisitions, succession planning and management buyouts

Cash flow is king, and monitoring it In the current environment should be a high priority, and should your business be facing any immediate or anticipate cash flow shortages, examining debtor finance could be advisable. The environment will become more challenging, so now is the time to prepare.