Increasing overdraft rates for small and medium businesses, despite the succession of rate cuts and the increased difficulty in obtaining them due to tightening credit, is increasing interest in flexible alternative cash flow products, such as debtor finance.
Business lending data from credit research service CANNEX shows the major banks increased rates on the common secured overdrafts by approximately 0.51%. Typical commercial overdrafts now range from around 9.42% to 11.58% secured against residential property.
According to Greg Charlwood, Asia Pacific Chief Executive, Bibby Financial Services , this is making alternative cash flow products such as debtor finance more attractive to SMEs looking to bolster cash flow and secure funding for their businesses in a tighter credit environment.
Businesses are more in need of cash flow funding in the current environment. Bibby Financial Services are receiving record levels of enquiries for debtor finance in 2009 and new client growth is running at 30% above 2008 levels for the first quarter. A significant amount of these enquiries are being driven by business owners and advisers looking to replace their overdraft rather than increasing limits.
Bibby Financial Services’ debtor finance product is a flexible line of credit against the business’ receivables, which converts up to 90% of the value of each sales invoice into cash on demand, usually within 24 hours of the invoice being raised. The remaining 10% is returned to the client, less fees and charges, on payment from the debtor.
The important benefit for business owners is that debtor finance is not secured against real estate security. Consequently, owners need not risk personal real estate security to the business. But importantly, because debtor finance facilities are linked to sales, unlike overdraft facilities the limits are flexible so funding is better matched to the needs of the business, particularly for growing businesses.
In addition, because the business is selling current assets from the balance sheet, the facility does not increase debt levels. Unlike a loan, the debt is paid when the debtor makes payment on the invoice.
For a business trading on credit terms with other businesses, a debtor finance facility can also often release a higher amount of funding than an overdraft, at rates very competitive with overdraft rates. When used appropriately, strong cash flow can even partially offset the cost of the facility, for example gaining early settlement discounts from suppliers by being able to meet expenses before they are due or taking advantage of bulk discounts.
In Australia, debtor finance is growing quickly, with turnover financed through debtor finance increasing by over 14% in the year to December 2008, according to the Institute for Factors and Discounters of Australia and New Zealand.
Greg Charlwood predicts debtor finance will come into its own in the current environment and become a financial mainstay for small and medium sized businesses in the near future. Bibby Financial Services expect debtor finance will continue to grow strongly in 2009, fuelled by tighter credit conditions, slowing customer payments and tougher trading conditions.