More than just home loans
Businesses are faced with a wide variety of situations as they move through the start-up, growth and maturity stages of their life cycle, and these situations have specific funding implications and requirements. Uniquely, debtor finance can be used in many of these situations, making it a very versatile and viable option for businesses going through change or growth.
For many small businesses, funding support is the most important hurdle. However, many owners, particularly younger entrepreneurs lack the asset base typically required for traditional funding facilities, such as property-secured overdrafts. Receivables are often the largest asset on the balance sheet for such businesses, and debtor finance can assist with raising funds by releasing cash from these assets. This additional liquidity also makes it easier to move the business towards that vital growth phase.
One challenge many businesses face is how to fund rapid growth. Whilst sales levels are increased, so are the costs associated with these sales, and if timing of receivables does not match payables then often the business is exposed to often serious cash flow issues, sometimes terminal. Because Debtor finance is linked to sales, it can ensure that the business’ working capital availability is linked more closely to its cash requirements, so that the ‘cash gap’ between sales and payment is bridged. The true value of debtor finance in this situation is in being able to sustain the growth rates achieved, meaning precious and time-sensitive growth opportunities can be fully realised.
During the life cycle of businesses, employees or managers may have the opportunity to buy out the owners. In such circumstances the buyer(s) individually they may not have the required personal property security to raise funds for the full buyout. In this situation, a debtor finance facility in addition to other funds can provide the funds necessary to buy out existing shareholders.
Slow customer payments can cause a reduction in working capital, which can slow the business down and cause serious trading difficulties which put hard-forged customer relationships at risk. Debtor Finance ensures that liquidity is maintained in periods of trading difficulties, giving businesses the means to more quickly deal with the underlying issues whilst continuing normal trade and maintaining good debtor relationships.
The sudden loss of a major customer either due to insolvency or competition can leave many businesses exposed to serious liquidity issues and margin pressure, particularly those businesses where the lost customer represented a high proportion of total sales for example a business supplying to a major retailer. Debtor Finance can provide additional liquidity in such times and provide the business some ‘breathing space’ to work through the issues of sales recovery or reviewing the cost base.
Many businesses have an element of seasonality in their sales, and for some it can be make or break in terms of annual results. Debtor Finance is built for such situations, ensuring that cash availability is matched with demand during peak periods, and cash can be brought forward in the leaner periods where trading is slower and debtor days stretch. The pre and post-Christmas period is usually a lean period for cash, and debtor finance can assist with supplying cash for wages and other essentials at this time, before turnover picks up.
Instead of entering into more complex funding arrangements such as Letters of Credit, Debtor Finance can provide cash flow against export debtors on an open item basis, which can be used to fund the next shipment. As well as a more swift approvals process, drawdowns typically take around 24 hours ensuring rapid availability of cash to take advantage of opportunities or to lock in favourable exchange rates.
In some cases, uncertain business environments can mean personal property is more at risk should business performance deteriorate. Regrettably, this was the case during the GFC, when rates of insolvency did increase and Director’s assets were increasingly exposed. Debtor Finance does not require real estate security, meaning the director(s) need not be exposed directly to this risk.
Family businesses or small businesses often need to think ahead towards a transfer of ownership as directors retire or even pass away. Unfortunately, the business’ funding is often secured against that owner’s personal property, where his or her equity has had an opportunity to grow over a longer period of time. It is a fact that often the incoming owner has insufficient equity to access finance, but because debtor finance does not require real estate security, the business can be funded own assets. The additional working capital is also of value as the new owner finds their feet.
Business owners may have opportunities to acquire competitors or other businesses, but not have the required funds to affect the purchase. Debtor Finance can raise funding against the businesses receivables to be used for this purpose, and in addition provide the additional liquidity and reliable cash flow to ensure a smooth integration of the business.
Where businesses are owned and run by a married couple and finance is secured against co-owned property, a divorce can often mean neither individual has sufficient equity to secure the required level of business funding. As debtor finance does not require personal property, the business can secure funding against its own assets so working capital is preserved despite the divorce proceedings, meaning minimal impact on ongoing operations.
It is not particularly uncommon for two or more directors to have personal property on the line when it comes to securing funding for the business. However, situations may arise where directors hold disproportionate shares of the risk if the underlying equity provided by each Director is different. Debtor Finance allows for the business funding to be linked purely to the business’ assets, thereby minimising the directors risk altogether, but also ensuring that risk is evenly shared.