Make sure you get your Ducks in a row when considering Debtor Finance
Make sure you get your ducks in a row!
There have been a number of changes to the landscape of the Australian Debtor Finance industry over the last few months. This started with CML (Early pay acquiring Cash Flow Finance Australia and later Cash Flow Advantage) and was followed by Scottish Pacific Business Finance acquiring Bibby Financial Services late in 2014.
Whilst this appears to be a consolidation of the industry it should be noted that there are many providers involved and each have their own particular nuances and strengths. There are also a number of new Funders operating in the Fintech space who are now becoming very active as well. It is more important than ever to make sure that the Funder meets your particular style of business as well as your needs.
When exploring a Debtor Finance solution it is very important that there is an understanding of the type of facility being offered and what that means for your business. It is also important that your advisors (Accountant,Broker,Banker ) are also fully informed of the requirements of this form of funding.
There are a number of points that should be explored and discussed before entering into a Debtor Finance facility including the following:
Do Debtors know that there is a Debtor Finance facility in place?
This varies dependent on the facility offered and the involvement of the funder in your day to day processes can also vary
If the facility offered is a Full Service factoring facility it essentially involves the sale of your Receivables to the Funder at a Discount. (Usually between 70 and 80% with the remaining balance less any fees returned at payment.). The fundamental thing that needs to be understood is that this facility entails the handing over of most Debtor Management functions to the Funder. In many cases this works well however in some industries this can impact on ongoing relationships with the debtor and therefore impact on future sales.
Disclosed facilities operate on a slightly different basis and rely on the assignment of Receivables to the funder. There is a notification on the invoice which advises that a Funder is being utilised and all Debtors are advised however there is still a high level of involvement and ownership by you in the Debtor Management process. You do however need to maintain a strong relationship with the Funders Account Managers to ensure that the facility operates smoothly.
Confidential Debtor Finance like a Disclosed facility relies on an Assignment over Book Debts (Receivables) and is a lower touch facility. There is no notification on the invoices and is in essence a line of credit against Receivables (Very similar to an Overdraft in Operation).The funder will utilise a third party from time to time to validate a sample of invoices however there will be a high reliance on the quality of supporting information provided to you to confirm the authenticity of invoices. This can at times be onerous for some businesses however it is important to have a clear understanding of the requirements up front. It is also critical to ensure that your Accounts Receivable/Book Keeper/Accountant are fully involved from the outset.
How many times a week can you send a batch of invoices?
This is a critical issue for some businesses and I have found with a number of funders that they allow only one or two batches of invoices to be processed per week. Additional fees can be charged for more batches to be processed. Whilst this seems OK it is a problem if the working capital requirements of your business require you to send batches on a more frequent basis
How often can you draw down the facility.?
As with above there are still a number of Funders who limit drawdowns to one or two per week. Again this can have a detrimental impact on the way that you manage your working capital. Additional fees and RTGS can apply when you request more frequent drawdown of funds from your facility.
What are the concentrations limits that impact on your facility?
This is a critical Issue as many Funders will only fund up to 30 to 40 per cent of your ledger for any individual Debtor (Even if the debtor is covered by Credit Insurance or is Sovereign Risk i.e. Government). You need to be sure that the level of funding is sufficient to support your requirements.
What is the maximum ageing allowed under the facility before recourse is applied?
Again this is a very important issue to be aware of. Many Funders operate on a 90 day End of Month Basis, whilst others offer a 90 days from Invoice date facility. There are however some Funders who will offer up to 120 days (fewer). This needs to be considered as the difference between End of Month and Invoice date terms can mean a significant impact on the availability of funds under your facility.
What is the Funders attitude to ATO arrears?
This is an issue that needs to be at the forefront of conversation with the Funder and your Broker/Adviser as it has a dramatic impact on the benefits to be derived from the facility. Many Funders are able to work within the framework of an existing arrangement with the ATO however there are some who will insist that ATO liabilities been paid down at commencement. This can be a problem if it removes the anticipated positive cash flow impact that was being sought.
The ability to provide the Funder with sufficient evidence that invoices is bona fide is absolutely central to any debtor finance facility. It is critical that you are aware at the commencement of any facility that you understand the protocols that the funder will use to validate your invoices. If this is not understood from the outset there can be delays in both the speed in which funds can be made available and the amount of funding that is ultimately released. This is also an area where there can be some reluctance by your Debtors to provide additional information. In short understand what is required to successfully operate the facility and ensure that internal processes are amended. It is also imperative that any new procedures are communicated to your staff.
How often does the Funder perform on site inspections ?
This is often incorrectly called an Audit. It is a simple snapshot site review of the fundamentals that impact on the Debtor Finance facility carried out by a representative of the Funder. In essence it will concentrate on Debtor , Creditors Taxation and Statutory payments Position, Working Capital and Financials Performance. In most cases this will take 3 to 4 hours on site at your office and will require input from you and your staff. Most providers operate on a quarterly cycle however many stretch out the cycle to either half yearly of annually depending on your performance. This is sometimes an additional cost which needs to be disclosed and understood at the outset.
Thane Commercial is a specialist Broker/ Consultant specialising in working capital solutions for Small to Medium businesses. In particular we concentrate on Debtor and Trade Finance and seek to provide solutions, which look at a company's full cycle from purchase order to final payment by the Debtor. Should you wish to discuss whether Debtor Finance is the right option for your business please do not hesitate to contact me for an obligation free discussion
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