Finding a solution doesn't need to be like finding a needle in a haystack
With a rapidly growing and changing economy it is imperative that Business Owners are able to find funding structures that will allow them to take advantage of opportunities that the Infrastructure boom will bring.I often work with or hear about SMEs who have entered into long term contracts and find that they are under stress as they have not "got their ducks in a row" at the commencement of the contract .In the majority of cases this is caused by not having a Funding Structure that works in a way that allows them to maximise the value of their contract by ensuring that they have a solution in place which allows them to fully fund their working capital cycle. It is not uncommon to be looking for a solution after a contract has commenced and as a consequence there are issues starting to appear around cash flow.
Many SMEs will approach their Bank in the first instance and depending on their existing relationship it may take considerable time and effort to progress through the Banks approval chain. This of course will be dependent on Balance Sheet strength, Profitability, Security , ATO position etc and if this is the preferred funding option it will be need the process to be commenced well in advance of the awarding of any contracts.If a traditional Banking Facility is not possible then many SMEs will then look to alternative funding models such as Debtor Finance/Factoring and will engage their broker to act on their behalf .If the Broker does not understand the Industry this will again be a tough path for the SME to tread and cause a great deal of angst for all involved. It is therefore imperative that there is understanding on the part of the Broker and the Business owner of the issues that contract based /progress claim contract funding cause for many of the more traditional Debtor Financiers. It is also very important to understand the different forms that Debtor Finance/factoring takes and the requirements that will need to be put in place.
Essentially a traditional Debtor Financier will look to establish whether the contracts entered into have any of the following items, which will exclude them from progressing with a transaction regardless of the strength of the Business involved. These issues include:
- Progressive Invoicing. If the contract allows the business to invoice on a monthly basis for works completed to date either by a percentage of works completed then a traditional Debtor Finance Facility will not normally be deemed acceptable, as each individual invoice needs to be collectable in its own right and not subject to the completion of the contract.
- Set Off. Under many contracts there will be a clause that allows for the Contractor to set off moneys owed to the sub-contractor that means that there is a higher level of perceived risk to the Funder for any funds that have been advanced. This comes into play where there are defects or if the sub-contractor is unable to complete their obligations under the contract (eg Insolvency)
- Assignment. Under most contracts there will be an assignment clause, which is essentially meant to preclude the completion of works by a third party that has not been approved by the Contractor. This is highly understandable however in many cases this is deemed by the Debtor Finance Industry to extend to the financial assignment of proceeds under a Debtor Finance facility and is an impediment to the provision of funding.
There are also a number of specialised Funders who are now in the Market Place who operate on a no lock in basis aimed at maximising flexibility and will take a position on particular invoices based on the strength of the Debtor involved as well as the underlying position of the SME involved. The fact that they do not require a Full Book position (Normally required by most Providers) and do not look to fund all Debtors often assists with the overall cost of the facility. This can be a key consideration as it is only a particular contract that requires a funding solution.
In addition there are also a number of specialist Supply Chain Funders coming into the Australian market who are well positioned to assist with the funding of raw Materials and components required to fulfil obligations under contracts and it may be necessary to look at structures that cover the complete working capital requirement of the contract to ensure that the SME is able to fully satisfy the working capital requirements required to complete the contract (s).
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|Tags: infratructure Progress Payment Invoicing Supply Chain Finance SME's Big 4 Banks Cash Flow Debtor Finance Debtors|