In the final part of our cash flow management series, Mark Beyer looks at finance options.
DEBTOR finance and insurance premium funding are not the most widely used finance products, but both can help substantially to improve cash flow management.
The beauty of both products is that lenders do not require ‘bricks and mortar’ security.
Instead, the advances are ‘secured’ against invoices and insurance policies respectively.
Debtor finance, also known as factoring and discounting, has been growing nationally at about 30 per cent per annum for the past four to five years, according to data collated by the Institute for Factors and Discounters.
Its latest survey found that turnover in Western Australia in the March 2003 quarter was $397 million, up nearly 50 per cent over March 2002.
While growth is rapid, the number of companies using debtor finance in WA is only about 200, according to IFD data.
CPA Australia’s latest small business survey, released last month, indicates that usage of debtor finance may be higher than the ISD data suggests.
The CPA survey found that about 9 per cent of small businesses use ‘factoring’ or ‘debtor finance’.
Adrian Hall, State manager of St George Bank subsidiary Scottish Pacific Business Finance, said the product was designed for growing businesses.
“With debtor finance, the bigger your debtors are, the more money is available to you,” Mr Hall said.
Typically the lender will advance up to 80 per cent of the value of outstanding invoices, with the money repaid as invoices are paid.
Mr Hall said many businesses used debtor finance only when they hit a ceiling on assetbased finance. That was starting to change, however.
“We don’t need to link it in to real estate to make it work, that is the advantage,” he said.
Mr Hall said labour hire firms were among the prime users of debtor finance, because they had to pay contractors weekly, but received payment from clients six or eight weeks later.
As a business expands, so does the funding gap – a gap that can be filled by debtor finance.
As well as the four national banks, providers of debtor finance in WA include Scottish Pacific, Benchmark Debtor Finance, Cash Resources, Cashflow Factors, Citizen Factoring, Key Factors and Orix Cashflow Finance.
There are two main kinds of debtor finance.
Factoring, which accounts for just 15 per cent of industry turnover, involves the sale of invoices to the financier. Typically, debtors are informed that their invoices have been sold.
The more popular option is invoice discounting, where the lender takes a debenture charge over the invoices. This is a confidential or non-disclosed facility.
Insurance premium funding enables businesses to pay their insurance premiums in monthly instalments over a full year, instead of facing big up-front payments.
It can improve cash flow and free up working capital, effectively becoming an additional line of credit.
Nationally the industry is worth between $2.1 billion and $2.8 billion, according to Perth-based Alliance Finance.
Alliance wrote $125 million of loans last financial year, making it a relatively small but fast growing player in the national scene.
Its main competitors include two big national firms, Hunter Premium Finance and Pacific Premium Funding, and local firm QPR.
Executive director Derrice Dillon said premium funders were able to provide competitive finance without needing property as security.
If clients do not make their monthly payments, Alliance can cancel the insurance policy and use the returned premium to pay any amount outstanding.
Ms Dillon said almost all loans were referred by insurance brokers rather than being sold direct to end customers.
