Debtor Finance and Option for Small Business
Getting credit is tough for any small business, but debtor finance and other facilities that use receivables as security are growing in popularity for business owners who do not have bricks and mortar assets to their names.
Total Australian debtor finance turnover in the December 2011 quarter was $61.3 billion – a 4 per cent increase from the preceding September 2011 quarter, according to data from the Institute of Discounting and Factoring.
In its simplest form, a debtor finance facility enables a business to receive payment for purchase orders without having to wait out the full length of the paymentterms agreed with the customer.
The facility can operate in two ways. The first is known as invoice discounting, where a business sells its receivables to a bank or a credit union at a discounted value, allowing it to receive usually up to 80 per cent of the money immediately, as opposed to waiting out the payment terms.
The second form, known as factoring, positions the bank or credit union as a middleman between vendor and customer. The bank provides immediate payment of the receivable to the vendor, and also assumes control of the debt recovery process. The receivable itself acts as security, rather than property, equipment or another form of collateral.
At an average interest rate of 13 per cent, a debtor finance facility can be an expensive way to get credit, but for business owners without access to any other options, it can be a helpful tool.
For The Little Brewery director Kylie Little a factoring arrangement will ensure there is always enough money in the kitty to pay the federal government tax excise on beer production.
The company, responsible for the “Wicked Elf” and “Mad Abbot” brands of beer, counts Woolworths’ Dan Murphy’s and Wesfarmers’ First Choice bottle shops as its biggest customers.
The two retailers have signed the brewery to payment terms of 60 to 90 days, which can make paying the tax a difficult task. “The excise is paid as we sell the product, but we’re waiting a long time for payment,” Little says.
The prospect of being able to outsource her account receivables function is an added bonus for her team of three.
“It’s impossible to keep on top of your books when you’re trying to keep the product getting out the door,” she says. “Handing the debtors’ ledger over to someone else [to manage] is great.”
Little was surprised by the amount of paperwork involved in setting up the new payment arrangements with customers. Nevertheless, she is convinced that the “three to four-month process” is worth the headache.
The financial controller at labour hire company Management Group Services Qld, Dany Rifai, believes that his debtor finance facility with Bibby Financial Services saves the company an average of $75,000 a year in wages.
“If I didn’t have [the financier] chasing up receivables, I would have to employ an accounts receivable person,” Rifai says.
He keeps costs down by borrowing what the company needs, rather than taking the full purchase order amount every time.
He says that the facility has enabled Management Group Services Qld to maintain strong growth, for a cost that he has calculated to be less than 2 per cent of annual revenue.
PUBLISHED: 05 APR 2012 00:13:49 | UPDATED: 05 APR 2012 08:32:35
The Australian Financial Review