Using Debtor Finance to Manage Business Cash Flows

Any business owner knows the importance of managing cash flows to ensure that liquidity remains strong and that the business has the ability to take advantage of sudden growth opportunities or big contracts. Late payments impact businesses severely as cash that could otherwise be reinvested in growing stock, marketing or other expansion opportunities is withheld. For a business making $5 million per year in revenues, each week of nonpayment takes $96,000 out of cash flows. Chasing late payers is also time consuming and can be expensive, in particular for small businesses without a dedicated invoicing team. The good news is that, according to the credit reporting agency Illion’s Q3 2018 statistics, late payments in Australian businesses are at record lows of just 10.4 days. This is a factor of the strong economy and low interest rates easing companies’ ability to pay.

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Regulatory Changes to Tackle Slow Payments by Corporates to SMEs  

The power imbalance between smaller businesses and larger businesses as described by the Small Business and Family Enterprise Ombudsman however remains significant as demonstrated by the fact that large businesses lag smaller business by as much as 6.6 days. Australia’s largest businesses (500+ employees) pay on average 14.6 business days late while small enterprises (6 to 19 employees) are the fastest at only 8 days overdue.

The Australian government took steps to remedy this imbalance late last year with the introduction of regulation requiring the 3,000 largest companies in Australia (turnover greater than $100m) to disclose how quickly they pay suppliers in their Annual Reports. These large businesses will also have to commit to 20-day payment terms to suppliers and subcontractors when bidding for government contracts. Prime Minister Scott Morison also announced that the Federal Government will reduce its payment times from 30 to 20 days by July 2019 and he has encouraged Australia’s states and territories to also adopt this practice. These changes should see a reduction in late payment times for large businesses over time.

Late Payments by Industry 

The statistics from Illion also show that by sector, retail is the slowest payer at 13.5 days while the agriculture and forestry sectors are the swiftest. Suppliers to retail companies in particular may need to plan for late payments when budgeting.

How Best to Respond to Late or Non-Payers 

Small businesses faced with a late paying large customer are put in a difficult situation as aggressive responses such as withdrawing supply or legal action may not be feasible or may cost the business more than the cost of the delayed payment. Instead, CPA Australia recommends that small businesses plan for some large corporations to pay as slowly as 90 to 120 days by ensuring that their budget has enough flexibility to manage late payments. Businesses should always check customer’s credit history and ensure that payment terms are indicated clearly on all contracts and invoices, even those sent to long term customers, to avoid any misunderstandings. Payment reminders should be sent automatically and businesses may consider late payment penalties (or early payment incentives) to encourage prompt payment. Engaging a lawyer or debt collector should be a last resort as it can jeopardize the customer relationship and is costly.

Use Debtor Finance to Unlock Cash from Unpaid Invoices

Debtor finance, also known as invoice finance or factoring, is an excellent alternative for businesses unwilling or unable to wait for customers to pay. In debtor finance, unpaid invoices are used as collateral for short term loans. Debtor finance companies will pay up to 85% of the value of the invoice up front. The finance company will then follow-up with your customer and the remaining portion of the invoice is paid to you once the customer makes full payment. Businesses can choose to retain the risk of non-payment of the invoice or sell the entire invoice and its risk to the finance company. Many debtor finance companies will now integrate electronically with a business’s invoicing and accounting software allowing you to finance an invoice instantaneously with the press of a button.

The cost of invoice finance varies but is a fee calculated as a % of the value of the invoice. As an invoice finance loan is very short term, its cost often compares favourably to many forms of unsecured loans. Invoices to well-known customers who have a strong reputation for paying fully and on time are obviously easier to sell to finance companies and will also garner lower fees than invoices to more risky customers.

Whenever you engage a debtor finance company, be aware that they will be in direct contact with your customer and their behaviour will reflect on your business. It is therefore important to engage a reputable finance company with whom you can trust your customer relationships and reputation. can assist you in shifting through the large debtor finance company and will help you find a company that provides good pricing while also supporting your business ethos and customer rapport.

Read more about Debtor Finance on the website or fill in our simple application form and let us help you find the best debtor finance for your business.

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