Why is this important?

One of the biggest impediments to the growth of a business is not having sufficient cash to support the increase in activity. A business may require additional funds to cover everything from higher wages, increases in debtors and stock levels, additional plant and equipment, and a general increase in business overheads.

The type of finance used to fund business growth may be very different from that used for other purposes. As with any form of financing, it is important to match the finance facility with the purpose, to ensure that it does the job it is intended to do.

If your business plans to build additional premises such as a warehouse, you may need to consider your long-term financing arrangements. Cash flow and working capital needs will require a totally different approach. One of the more common pitfalls is that a business could tie up its cash flow by not matching its need directly with the right financing solution.

While many businesses will fund their growth using a bank overdraft or bill facility, these are not necessarily the best options.

Ideally, the finance facility used to provide the cash flow that a business needs to grow should have the following features:

• the flexibility to increase automatically as the business grows and requires increasing amounts of working capital
• the flexibility of a come-and-go feature to match the cash flow of the business
• the ability to draw down as and when needed on short notice
• a cost structure allowing for interest and charges only on the funds used at any time
• the ability to accelerate cash flow

What to do

One of the most effective ways to address this financing issue is to leverage the current assets of the business by using commercial debtor finance facilities.

There are a number of different types of facilities within this category.

Debt factoring

This form of finance has been around for many years and has been used widely in Europe and the United States. It was traditionally a popular finance method in the garment industry in these markets but since then has been used far more widely in the general business community. In Australia, some stigma has become attached to the product and it has been far less popular as a means of providing cash flow finance.

There are basically two different forms of the product.

• Full service factoring: involves the financier purchasing the book debts of a client at a specified discount rate (usually around 80%) and notifying the debtors of the factoring arrangement. The financier provides the service of operating the debtor's ledger, assessing credit, collecting the debts and keeping the debtors records for their client.
• Invoice discounting: Basically, this is another form of factoring. The difference is that the debtors are not made aware of the sale of the debts to a financier, and the company continues to manage their client relationships and collect their accounts in the normal way.

How it works

• The financier sets up a credit limit on the facility, which should allow for growth.
• As invoices are raised they are sent to clients in the normal way and copies are sent to the financier (usually in weekly batches).
• The financier pays the value of the invoices at the agreed discount rate (around 80%), usually within 48 hours.
• Debts are collected from clients in the usual way but banked direct to an account of the financier.
• The balance (remaining 20%) of the debts collected for the month are paid by the financier, less fees and charges and any debts that have not been paid after the recourse period (usually 90 days).

The benefits of invoice discounting

• Accelerates cash flow – 80% of the value of sales is received within 48 hours of delivery and invoicing. (Your sales become an immediate source of additional working capital.)
• Provides more regular cash flow and frees up capital so you can invest in your business
• unlike bank overdrafts, no long-term commitment is required – you use funds when you need them and your facility is able to grow in line with the growth of your sales
• Increases your purchasing power and improves supplier relationships.
• Can enable early payment discounts from suppliers
• Preserves bank credit lines
• Unlike factoring, you retain full control of your debtors ledger, ensuring complete confidentiality
• The ability to negotiate the best and most appropriate trading terms with clients and suppliers.

Who is eligible for commercial debtor finance?

Banks and financiers providing these products set certain criteria generally along the following lines:

• businesses trading locally or with overseas customers on open account terms
• businesses with a certain minimum annual turnover, usually at least $2 million or more
• businesses with no property security available to secure working capital finance or needing property security released
• profitable businesses needing cash flow to finance expansion/sales growth or those who have too much capital tied up in receivables
• businesses invoicing on completion or delivery of products or services

Receivables and inventory loans

This is a loan secured against the value of your debtors ledger and may also include inventory. The lending margins will generally be significantly less than that available under a commercial debtor finance facility for debtors. A different margin again will probably be set for inventory. The quality of the book debts will need to be high and the financier will require regular reports on the value of the security. They will also require some auditing procedure to regularly confirm that the value and quality of their security continues to support the loan.

If your business is expanding with new or increasing sales to overseas markets, a number of finance products are available specifically to cater for export sales.

Trade finance or export debtor finance

How it works

• ensures your cash flow keeps pace with your growing export sales
• enables you to export with confidence, knowing that you can be protected from the risks of bad debts
• generates cash flow to fund further sales and growth, while offering extended terms to your export customers
• delivers the convenience and competitive advantage of being able to offer open account terms
• usually provides access (via overseas branches or affiliated banks) to international credit control expertise to help collect debts effectively and efficiently
• can be with or without credit protection depending on your needs and spread of risks
• allows you to conduct your own collections or use the bank services to assist

The benefits of export debtor finance

• you are free to negotiate the most appropriate terms for the sale
• your export sales become an immediate source of additional working capital
• your bank may be able provide you with credit protection that can help safeguard your cash flow and profits
• if languages and time zones make long-range collection difficult, you have a range of support services usually available through your bank
• you are given assistance with collection, transmission and processing of your overseas customer payments
• you have funding available in the currency of the eligible invoice for many overseas currencies

Who is eligible for export debtor finance?

• businesses trading locally or with overseas customers on open account terms
• businesses with a certain minimum annual turnover, usually at least $2 million or more
• businesses with no property security available to secure working capital finance or needing property security released
• profitable businesses needing cash flow to finance expansion/sales growth or which have too much capital tied up in receivables
• businesses invoicing on completion or shipment of products or services

Where to go for help

Do it yourself

Most of the major Australian banks provide facilities similar to those outlined above. Discuss your individual needs with your relationship manager or commercial banking centre of your bank. There are also financiers who specialise in providing cash flow financing and a number of overseas based banks are particularly suitable if you have the need for export finance.

Australian Business Trade Services

Providing practical guidance on international trade. Phone 13 26 96. Australian Business International Trade Services

Professional advice on accessing R&D grants, export grants  and the R&D tax Concession/Credit system.   

Ph: 02 9797 1777  Email: aiserv@bigpond.net.au Website: www.australianindustryservices.com.au

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