Posted by Neil Tunstall on 11 May 2015
There are quite a few positive articles about Debtor Finance at the moment which is great to see and whilst I agree with their sentiment it should be noted that Debtor Finance is in most cases a part of a solution and not the whole solution.
When Business Owners are considering structures such as Debtor Finance to assist with their growth it is extremely important that they really consider their motivation for doing so.The question that Business owners need to ask themselves (and their advisers, bankers or brokers) is this. Is using Debtor Finance a legitimate financing tool that can assist holistically with their working capital needs or is it seen as a last resort? This is extremely important . If the answer to this question is that it is being used as a last resort, the end result more often than not is that the Company does not receive the increase in working capital that it expects or requires to grow and sadly it may be staving off the inevitable. If however the answer is that by restructuring with a Debtor Finance facility as a part of their strategy they are able to achieve greater flexibility then it is very much a solution that should be pursued.
Many companies enter Debtor Finance structures and simply look at the amount of cash that can be freed up without considering how they can utilize the facility to really assist them to grow and prosper. Unfortunately in many cases they is little thought given to the impact and possibilities that can be unlocked through using a more flexible structure.This is a short term view which in many cases fails once the initial bounce from the facility is lost. In most cases the key to Debtor Finance is understanding the level of hard core debt that is already chewing up their working capital. For example if a Debtor Finance facility simply replaces a fully drawn Overdraft then there is little benefit to the company. If it is however used as a part of a strategy that shifts the hard core debt burden and is then used to create flexibility and growth then Debtor Finance is an excellent tool as it increases their capacity to:
- Take advantage of Supplier Discounts
- Reduce reliance on Debtor Discounts to improve cash flow
- Release reliance on available Bricks and Mortar Security (in many cases the family home)
- Introduce new products and customers
- Reduce Creditors
- Substantially reduce ATO outstandings
In short there must be a benefit to the company!The Business Owner also needs to explore their supplier arrangements at the same time and if they are utilizing imported components and/or raw materials look at the capacity that may be delivered by redirecting any security that was previously required to support their Overdraft into a Trade Finance facility .This would also help fund growth.
A Debtor Finance facility can also be strategically important when considering new product lines, acquisitions, succession planning and marital disputes as it is not in most cases reliant on the Director/Shareholders personal Bricks and Mortar security.As I commented above there is a real need to fully understand and explore the complete ramifications of Debtor finance and the flexibility that it affords as part of a more holistic approach to Cash Flow financing.
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