More than 4,500 Australian businesses, with combined annual revenue of $65 billion, use debtor finance. These businesses have annual sales ranging from $500,000 to $300 million.
Debtor finance facilities best suit growing businesses in industries such as labour hire, manufacturing, wholesale and distribution, transport and printing. Typically businesses that offer products or services to other businesses on standard trade credit terms.
Debtor finance in Australia has certainly become more accepted over the past 15 years. In this time, the annual turnover has increased from $10 billion to the current figure of $65 billion.
Notwithstanding this growth, in our dealings with accountants there are still three common myths that we often need to overcome to ensure our accounting contacts feel comfortable to recommend debtor finance to their clients.
1. Isn’t debtor finance for struggling businesses?
That's certainly not the case. There's a growing awareness of debtor finance as a viable long-term funding alternative for SMEs.
Debtor finance should be viewed in a similar light to overdrafts. It is a means by which to meet the everyday working capital requirements of a business.
Many clients have been with Scottish Pacific for more than 10 years, some for more than 20 years.
More and more businesses are turning to debtor finance to get away from having to offer the business owner's home as security and to release the business from restrictive bank covenants. This allows the business owner to build their personal net worth.
2. Is it expensive?
Compared to what? Compared to early settlement discount or credit cards, certainly not. Compared to borrowings secured against personal property, it is more expensive, but not overly so.
The question has to be: can a business afford not to use debtor finance?
If debtor finance provides the working capital requirements to grow the business, it will pay for itself. If it can be done without using assets outside the business, it provides for a better return on capital and makes any succession planning a lot easier.
3. Will my customers think my business is in trouble?
Why should they? 4,500 businesses in Australia use debtor finance, many of them with banks. Around the world more than US$3 trillion of sales are handled and in the United Kingdom, 65,000 businesses use debtor finance.
Whilst confidential facilities are available, more than half the businesses using debtor finance have disclosed facilities, taking advantage of the extra services this product offers, such as collections, follow-up calls, reminder letters and statements, in effect an outsourced sales ledger administration service.
Australia’s largest companies are all paying suppliers that use debtor finance, with no impact on the relationship.
Peter Langham is CEO of national working capital solutions specialist Scottish Pacific Business Finance. After training as an accountant, Peter has more than 25 years’ experience in the debtor finance industry. He founded Benchmark Debtor Finance in 1998 before becoming CEO of Scottish Pacific following the acquisition of the business from St George in 2007. Peter has overseen significant growth at Scottish Pacific, which has consistently outperformed the market over the past five years.