Debtor finance, also known as invoice finance, gives growing businesses access to finance that would otherwise be trapped in receivables and incoming payments.
Wayne Smith, general manager at Scottish Pacific Debtor Finance, told StartupSmart debtor finance could be a cashflow lifesaver for start-ups and small businesses.
“It can help grow the business through enhancing cashflow to fund staff, stock or capital expenditure. It helps provide peace of mind to business owners and is a standalone facility that can sit alongside other business borrowings, such as term loans and leasing,” Smith says.
He shared his top tips for managing debtor financing as a small business below:
Do your research first
Think about the sector you operate in and the situation your business is in. Debtor finance is a great option for businesses that sell to other businesses on standard trade credit terms.
Most providers have specialist business development managers who are more than happy to field queries from businesses interested in accessing debtor finance. Pick up the phone and talk to a couple of them, to get a feel for their approach.
You can also research via the internet or talk to your broker. If your broker is not familiar with the concept, he or she may know a specialist or be able to access one via their aggregator.
Pick the right provider
There are a number of providers, ranging from the majors in NAB and Westpac through to small regional independents. The larger specialist providers tend to have the widest range of options, enabling them to tailor a solution to a business’s specific circumstances.
Deal with a provider who will be upfront from the very beginning and explain all the costs and fees involved. It’s important to choose someone you feel comfortable with as a partner helping your business grow.
Work out which debtor financing provider model will works best for you
Some clients allow the debtor finance provider to fully manage accounts receivables, which lets them focus on the business and not spend time chasing debts. Others prefer to handle invoices direct with clients, and the provider works in the background without your clients even knowing you have a debtor finance facility.
Work out which of these two options best suit your business. Making the call as to which option will best suit your business often comes down to the resources you have at your disposal and how you want to spend your time.
For established, profitable businesses with experienced staff in the accounting function a confidential facility may be the most appropriate. Conversely, in a small business, with limited resources, the extra support of a professional collections service operating in tandem with the funding might be the most attractive option.
Use the relief of accessing a cash infusion to review your operations
Once your facility is in place, look at how you pay your own suppliers – with a stronger cashflow in place, can you pay your own suppliers early and qualify for their discount period?
From the debtor financier’s perspective, the quality and management of the receivables ledger is paramount as it represents their security, so make sure you make yourself attractive to a funder. A good start is to make sure your invoices contain all the required statutory information and relevant references to purchase orders. Ensure you keep robust “proof of delivery of goods or services” records. This is essential in the event of any dispute.