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A growing business needs flexible finance. Many expanding businesses find they are unable to reach their full potential when working capital facilities do not expand in line with increased sales.
As your business grows the "cash-gap" widens between you paying your suppliers and your customers paying you.
New customers and orders may have to be turned away as existing facilities are unable to keep pace with demand.
Debtor Finance is one method of overcoming these problems. It allows the business to expand, by using the assets of the business to fund the increase in the "cash-gap". The following discussion provides more information regarding Debtor Finance.
Why Debtor Finance?
When does a business need additional working capital?
How does the service work?
What does it cost?
Case Studies
What are the Debtor Finance criteria?
What information is required from the business?
Why Debtor Finance?
- A flexible source of working capital to small to medium business enterprises.
- The financier can advance up to 80% of trade debts with the balance available on payment by the debtor.
- An alternative to the traditional overdraft that does not require bricks and mortar security.
- A facility that grows as the business grows, using today's sales to fund tomorrow's growth.
- Improved purchasing power.
- No need for costly settlement discounts.
Debtor Finance is recognised as an important and useful tool for funding working capital needs, particularly for small to medium sized businesses to facilitate growth or change. It is a very easy way of providing fast cash for a fast growing business. Debtor Finance releases funds tied up in trade debtors, to make the business more successful.
Debtor finance can be utilised to assist in many situations, common scenarios are:
Fully Funded - Most traditional forms of business finance are secured against property, commonly 'bricks and mortar'. This relatively simple and efficient method does have a weakness in that the funds available are restricted by 'loan to value' ratios. Growth could therefore be restricted. In these circumstances debtor finance can be used as either a top up facility or as replacement source of funding.
Change of Ownership / Succession - Changes to ownership or shareholdings can often create problems, particularly if bank facilities are secured against the personal assets of the existing owners. Debtor finance not only allows a business owner to remove their personal assets from the equation (an attractive proposition in its own right) but it can also be used to facilitate a smooth transfer, since Debtor Finance funding is secured against the businesses debtors which remain constant.
Management Buy Outs - The raising of capital is often a stumbling block for buyouts. Debtor finance can be used to raise the necessary capital, by raising funds in this way; it effectively allows the purchase of the business to be self-funded.
High Labour Costs - Businesses suffering from a lack of working capital will often stretch their creditor payments to avoid shortfalls. However where the main or largest creditor is in fact staff costs (Temp Labour Hire firms are a good example) this option is not available, since employees expect to be paid on time! By turning invoices into instant funds the availability of working capital is greatly improved.
Start Ups - Many new businesses find it difficult to raise working capital, since traditional forms of finance rely heavily on past performance, financial history etc. Whilst such indicators do form part of the review process, they in themselves are not a prerequisite. Debtor finance is a common form of funding to new ventures.
Expensive Settlement Discounts - Debtor Finance can do away with expensive settlement discounts, release fixed assets, including the family home and leave management free to concentrate on increasing profit.
Ongoing Facility - Debtor Finance automatically grows in line with sales without the need to renegotiate increased facilities. Management can strive for growth, confident that the growth can be financed.
Debtor finance is not the answer to all circumstances, there are some instances where it is not suitable, and these include:
Non-Trade Debts - Debtor finance is only available to businesses with trade debts. Invoices issued to private individuals cannot be funded. If a prospective business has a mix of retail and trade debts, funding would only be available to the trade element.
Contractual / Progress Payments - A key requirement criteria of debtor finance is that the debts are for tangible goods and or services and that all invoices are payable in full in their own right, not being the subject of progress claims for an ongoing contract or potentially subject to a contra / penalty claims. Consequently businesses that trade within such environments, for example the construction sector, are generally not suitable for funding (see Professional Fee Funding for an alternative source of accessing funds).
Professional Services (Accountants, Solicitors, Medical etc) - For similar reasons as mentioned above, these sectors are generally unsuitable for debtor finance (see Professional Fee Funding for an alternative source of accessing funds).
Our clients say... "It's like extra security. You know that your potential is not limited by the amount of money you have today but by the amount you can generate"
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When does a business need additional working capital?
- During substantial growth
- When it is fully borrowed against fixed assets
- To facilitate a management buyout or an acquisition
- To support a high labour expense which cannot be "stretched"
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>How Does the Service Work?
 The debtor finance company we use offers both disclosed and confidential debtor finance facilities. With a disclosed facility, the finance company sets up and administers a professional sales ledger on your behalf, issue statements to debtors and generally maintains an accurate record of your sales and receipts. Debtor payments are directed to the financier. With a confidential facility, your debtors are unaware of the financier's involvement; you are responsible for the professional maintenance of the sales ledger. Debtor payments are paid directly to your company.
On an ongoing basis for both types of facility, details of sales are forwarded to the finance company in an agreed format, this may be daily, weekly or monthly. The finance company makes available an initial payment of up to 80% of the approved value of the invoices, less fees, within 24 hours of processing. Usually within 24 hours of the invoice being paid by the debtor, the balance of 20% (less fees) is available to you.
The finance company recognises that a good relationship between the client and debtor are vital and for this reason, credit control and collection of debts generally remain the client's responsibility, though they will assist where necessary.
The finance companies clients say...
"The service is seamless, we don't have to give it a second thought. I can concentrate on other things that are more beneficial"
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What does it cost?
"No hidden charges, lots of hidden benefits."
The costs are sometimes slightly more than you would pay for an overdraft, but debtor finance can bring significantly more benefits to your business. Some costs can be offset against savings for example:
- being in a better buying position
- the time saved by management being more productive
- no need to offer settlement discounts
However, we believe that the decision to proceed should be based on what debtor finance can do for the future benefit of your business. Unless the financier can clearly demonstrate that the benefits outweigh the costs of using the services, then we would advise against it.
Firstly the financier will charge a management fee as a percentage of invoices received by them. This fee is negotiated with each client at the outset so you know exactly what the cost will be. The management fee can vary between 0.35% and 3%.
Secondly, a discounting fee is charged on the balance of initial payments made, plus fees, less collections from debtors. This is normally 2-3% per annum over the quoted overdraft reference rate.
Finally a once only arrangement fee is charged to cover set up, legal costs plus government charges, this is deducted from the first payment made to you.
All rates and/or costs are dependent upon turnover, workload and perceived risk.
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Case Studies
Debtor finance can assist a businesses growth and development in numerous situations and circumstances. The following are actual examples of how our financier has assisted:
Baby Furniture Manufacturer
The company has had a facility with the financier for several years during which time the business had undergone considerable changes to shareholding, management structure and market focus.
Despite these changes the facility has continued and sustained growth has been achieved. If a traditional bank facility had been relied upon, changes to ownership would have caused difficulties due to means of securing the facility i.e. changes to the owner's personal assets.
It can be seen that in the case of family businesses, where personnel changes and succession planning need to be considered, debtor finance can offer flexibility and continuity.
Precision Engineer
The business had limited capital but needed to invest in new hi tech equipment in order to maintain growth and competitiveness. Debtor finance allowed the company to maintain steady profitable growth while keeping the directors' private assets out of the business
Chemical Manufacturer
In a business with 2 equal partners, one shareholder had greater personal assets than the other. If these assets were used to secure a bank facility, the risks for each shareholder would not be in proportion to their respective shareholdings.
Their facility with a major bank was terminated because the company no longer fitted the banks client profile, being too small. The company moved to debtor financing over 3 years ago and have since trebled in size, while the directors' personal assets remain out of the business.
Optical Lens Supplier
The business was purchased for $300,000 leaving little or no working capital. To avoid the need for additional new equity the principals used debtor finance. The business was able to grow successfully without further injection of capital and subsequently sold 4 years later for $3,000,000.
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What are the Debtor Finance criteria?
- Tangible goods or services to repeat trade creditors on credit terms.
- SME's in wholesaling, distribution, manufacturing or temporary labour hire with annual sales in the range $300k to $12mn.
- Clean debts free of progress claims, contractual terms and penalties.
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What information is required from the business?
To provide an indication of the cost and suitability of debtor finance for your business, they will require:
- Nature of business and length of time in business
- Aged debtors summary
- Aged creditors summary
- Recent management accounts (P&L and Balance Sheet)
Click the button below to find out more information tailored to your situation.
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