Commercial Lending Guide: Debtor Finance

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    Awaken to an alternative market

    In a recent survey, 70% of brokers who work with small businesses said cash flow had become more of a problem in the past 12 months, and 98% said it was harder for those businesses to access cash flow.

    There are two reasons a business might need cash flow.

    The first is in order to run its day-to-day business, including hiring staff and restocking products.

    The second is if the business wants to grow and needs increased cash flow to expand.

    Often the business may have won a new contract that requires investment, or the banks may have stopped providing funding, or there may be an ATO debt that means it doesn’t quality for a business loan.

    One of the biggest problems for some businesses, however, is that there are often waiting periods of 30, 60 or maybe even 90 days for invoices to be paid.

    This is where debtor finance comes in. Funders will pay the outstanding invoice to the business so they can carry on moving forward.

    Linden Toll, the CEO of one such funder, Apricity, says the easiest way to look at it is that the business is just bringing forward the money it is already owed.

    Any type of business could need help with its cash flow. If it’s not receiving cash on delivery, there is likely to be a wait time for invoice payments. The way Apricity assists with this is by lending money to the business, then working directly with the debtor to arrange repayment.

    For instance, if a restaurant is carrying out large catering orders, it might leave an invoice with its customer that may need to be paid within 60 days.

    Apricity will fund the restaurant with the money it is waiting for, and the restaurant’s customers will then repay Apricity directly.

    Toll says that, traditionally, people have gone to the banks for all their different finance needs. But two things have happened over the past 12 to 18 months.

    “One is they have had a rough time in the royal commission. But secondly, they’re slowing down on the various types of finance based against what is a sliding market in terms of property.”

    Because of this sliding market, banks are not as willing to lend to businesses against certain assets. Luckily, the non-bank space is becoming more sophisticated.

    There are growing opportunities to find solutions that support the best interests of clients, Toll says.

    “People are awakening to an alternative market, which can provide flexible and different options to what the banks can,” he says.

    Looking ahead, Toll does not see the banks’ appetite turning around any time soon, but he believes that in another 12 months they may start to look at SME lending again.

    In the meantime, the opportunities in the non-bank sector are a “win-win” for businesses, he says, particularly with the breadth and quality of offers coming from the space.

    Apricity has certainly seen clients turning to debtor finance because the banks are not willing to provide the funding they need. But this does not mean debtor finance is a guaranteed fallback.

    When a business customer comes to funders like Apricity, it must meet the right criteria.

    Apricity does not take security, other than the invoices themselves, so the decision is based mainly on the creditworthiness of the business’s end customer.

    Then there is an independent assessment of the customer to work out if that particular facility is the right one for their business.

    Once the funding is complete, Toll says their goal is to help the business grow.

    “People are awakening to an alternative market, which can provide flexible and different options to what the banks can” Linden Toll, Apricity

    “This means we work closely with our customers to help ensure transactions are undertaken quickly and seamlessly, every payment is processed accurately, and we are responsive to their needs.”

    So where do brokers come in? Toll says brokers are a “tremendous referral source” as they are able to identify and refer the right customers. Going out and finding those businesses that need debtor finance without using brokers is like trying to find “a needle in a haystack”.

    Brokers, who are already dealing with clients for other areas of finance, can identify that need for help with their cash flow much more easily.

    They also have the important job of educating their business clients around the debtor finance contracts.

    There are different fee structures, various add-ons and clauses around how to get out of the contract.

    Apricity’s business model was set up in the belief that the market was missing a fair and transparent funder; instead it saw that clients were locked into inflexible contracts with complex and opaque fees and high financial disincentives.

    Now, as we find with many non-banks and fintechs, Apricity’s size means it can be flexible, responsive and more open about its terms.

    Over the past 12 months, not only have businesses found it harder to access the finance they need but brokers have had to consider what happens if commission is removed.

    Because of a combination of these factors, Toll says Apricity has seen growing demand in the number of enquiries from brokers. “All types of finance are cyclical,” he says.

    “To have add-ons such as this and to be aware of other types of finance allows [brokers] to broaden and diversify their income streams, but also to become trusted advisers to their clients.”

    For brokers moving into debtor finance for the first time, it’s all about asking the right questions and having the conversations with customers.

    It could be as simple as asking a business customer what their biggest pain points are. Toll says a lot of businesses tell them cash flow is an issue.

    “It’s a point that gets arrived at quite quickly.”

    The next question to ask is around who the business’s end customers are and what trade terms they have imposed – whether they are on 30-day terms, 60-day terms or, with some of the larger businesses, 90-day terms.

    Asking about this will demonstrate how big their need is for help the cash flow process, Toll explains.

    “To have add-ons such as this and to be aware of other types of finance allows [brokers] to broaden and diversify their income streams” Linden Toll, Apricity

    Brokers looking for that extra income stream can benefit from an upfront commission on debtor finance deals.

    There is also an ongoing commission based on the facility limit used each month. While education for the industry has improved, there is more that can be done for mortgage brokers looking at debtor finance.

    Toll says brokers need to do their homework before offering solutions to a client. With a number of debtor finance options to help businesses with their cash flow, and those often confusing contract terms, brokers are encouraged to reach out to Apricity’s business development team to look at the business situation.

    “My view is that brokers can and should depend on the providers to help them with that education,” Toll says.

    “We see ourselves not just as a provider of a facility but as people who have the ability to help them understand complex situations as well.”

    Apricity has a business development team to help walk brokers through scenarios, and Toll says it is keen to help educate them. “We’re very much about enhancing and bringing forward an industry that can make huge differences to business,” he says.

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