Choosing a finance facility is one of the most significant and time consuming decisions business owners are likely to make – get it wrong, and it will add cost unnecessarily (particularly switching costs) and cut into margins. Get it right, and the business can grow profitably and without serious constraints. So it’s clearly important to make informed decisions to put the business on a sound footing. This is of course true for debtor finance.

Debtor Finance is often considered a relatively ‘expensive’ form of business funding. Whilst there is some truth to this statement however, this view is often mistakenly based on a simple comparison of headline rates of interest. What’s more, it also fails to take into account how the facility is used, the more holistic value of the service provided and the bottom line benefits that come with stronger cash flow finance.

Reduced need for early settlement discounts

Debtor finance tends to negate the need for early settlement discounts, so quite simply this expensive practice can be scaled down or completely done away with, saving up to 10% of the margin on sales in the process, which can then be written back to profit. In this way, the savings realisable from this will help offset the additional cost of the facility.

Efficient account receivable service

The credit control function which Debtor Finance facilities carry are often more suitable for SMEs which don’t have the resource to employ an efficient, dedicated receivables area. Debtor Financiers are experts when it comes to receivables, often realising improved debt turn through access to superior training, best practice technique, efficient processes, superior credit information and simply through the fact that because they specialise in this function, it tends to ensure debtors pay promptly.

Improved debt turn

Time is of course money. Take a simple example of a business turning over $10m per annum. Assuming a rate of interest of 10% per annum, a 3 day increase to debt turn will equate to almost an $8000 increase in interest costs which need to be funded. Hence, with the credit control function provided by debtor finance, debt turn can be improved to realise savings or offset the additional costs.

Increased sales levels

It is true that turnover is vanity, profit is sanity. But assuming that good margins are available and costs are well controlled, then it should follow that increased turnover should equate to increased profitability. With debtor finance an ideal facility for funding sales growth, the additional profits made will more than offset the additional funding costs.

More streamlined business operation and economies of scale

Reliable cash flow and well-managed receivables are a cornerstone of a successful business. Knowing expected cash flows provides confidence for decision making and means that major issues with costly remedies do not arise. Additionally, with the stronger cashflow and increased funding provided by debtor finance, growth can be fast-tracked allowing economies of scale to be accessed as soon as possible to improve margins and offset funding costs.

Greater buying power and rapid access to funding

Better buying power can mean supplier discounts are more accessible, providing the business an opportunity to secure better margins to offset the cost of financing. Similarly, with invoices able to be liquidated quickly, the business can raise cash fast to take advantage of other opportunities e.g. fire sale prices.

The hidden costs of ‘cheap money’ and inflexible funding solutions

On face value, lower rates of interest are of course attractive, but it is the hidden costs, some of them non-monetary, which need to be understood and where possible, mitigated or avoided.

  1. What are the terms and conditions attached to the facility?
  2. What is the contract term? How long would your business be locked in?
  3. How long will it take to review limits upwards? How difficult will this process be?
  4. Are all your funding eggs in one basket? How difficult will it be to exit this arrangement and at what cost?
  5. What will happen if your business falls outside your current lender’s criteria? Are you sure you could refinance quickly with minimal interruption to your business? If not, what will it cost?

Debtor Finance – an option worth considering

As we have seen, the additional costs of debtor finance can be at least partially offset by the benefits of better cashflow, if not fully offset. Of course other facilities are often more appropriate in most circumstances, but used wisely, debtor finance can be a very versatile and effective solution to help the business trade smoothly and avoid the ‘bumps in the road’. As a final thought, what premium would you put on having ‘peace of mind’ that the risks of poor cash floor are minimised and you can look forward to investing with confidence?