By Glen Baker
In 2015 business owners are spoilt for choice when it comes to finance options to help bolster cash flow and instill growth. Debtor financing and invoice financing especially have now become mainstream solutions.
Business finance has made giant strides since the days when owners went cap in hand to the bank manager for a loan. I recall my father putting on a tie and jacket in the late 60s to nervously meet with the manager of the local Bank of New Zealand to extend the overdraft on his dairy-grocery business. Who would have thought that some 45 years later, there would be such a plethora of finance options available to business owners looking to grow their business or smooth the cash flow.
We’ve since discovered the power of balance sheet assets – money owed from the sale of goods or services that can be accessed virtually straight away, thanks to the services of a growing number of finance providers.
We are of course talking about the various forms of factoring – and debtor or invoice financing – finance options that have slowly but surely been gaining widespread acceptance in New Zealand’s business community over the past decade or two. I say 'slowly' because this form of finance was universally accepted overseas long before people got the hang of it here.
And yet there is still some confusion surrounding the different options – so an explanation is called for. Perhaps the best explanation is one from the Debtor and Invoice Finance Association of Australia and New Zealand, which reads: “Factoring and discounting, also known as cash flow or debtor finance, are among the most powerful financial tools available to business. Invoice Discounting simply involves a business turning its unpaid invoices into cash. Factoring involves the sale of a business’s unpaid invoices as with discounting, but in addition the sales accounting functions may be provided by the factor, who manages the sales ledger and collection of accounts.”
Of course, the big deal about these alternatives to bank finance, and one that Craig Brown, General Manager Lending, at Lock Finance thinks should be shouted from the rooftops, is that no property is required as security for these working capital facilities. It is secured through the business’s own asset base – the debtors ledger, or individual invoices – depending on which option you go for. That means the family home is safe.
“Why continue to fund plant and machinery, vehicles and cash flow from bricks and mortar?” asks Brown. “Use a lender that is a specialist in that asset. Will the banks lend up to 80 to 90 percent of the value of a receivables ledger? Unlikely!”
Brown wonders what will happen in the future when younger business owners look to obtain business finance when they can’t even afford to buy a house to use for security.
“I know a 27 year old who started his own business which is now only 12 months old but turning over $400k and looking to double this year. A bank may only provide a small “unsecured” $20k overdraft. He has no property to leverage against, so how does he grow his business? The answer is a cash flow facility where he can leverage against his business debtors”.
Brown believes that reduced home ownership will mean that more and more business owners, especially at the SME level, will need to look at other funding options.
What about the cost?
Unfortunately there can be confusion surrounding the true cost of these alternative funding options, and understandably cost still appears to be the main driver when looking for a cash flow facility. “Cash flow facilities secured by property, from the likes of banks, do attract a cheaper rate,” explains Brown. “However, when dealing with a reputable provider you’ll see that the costs may not be as much as you’re initially led to believe. There is still a lot of misinformation about this. “Would you pay more to access a higher level of cash? If a bank is limiting your overdraft limit then what is the opportunity cost? If you look to sell a shareholding to just bring in more cash to assist with cash flow, what is the cost of losing a share in your business? “Why offer a ten percent discount to clients to get debtors to pay quicker when the cost of a cash flow facility may only be two to three percent?” he asks. “So you tell me, what is expensive?”
With finance solutions as diverse as these on the market, business owners wanting to expand their enterprises have simply never had it so good. But always remember that the best finance solution will come from working with an expert who takes the time to understand your business. Something I’m sure that rarely happened back in the day when business owners like my Dad went down on bended knee before the almighty bank manager.
Glenn Baker
Editor of NZ Business
NZB July 2015