MPA and Westpac team up to explore how brokers can add debtor finance to their offering
Although debtor finance isn’t just for SMEs, they are often an ideal candidate for debtor or cash flow finance. SME bosses consistently name cash flow as a top concern in running a small business. And according to ABS statistics, the sector employs almost half of our 10.7 million working Australians. That’s a large number of clients for whom debtor finance can open up an exponentially larger number of opportunities.
Boost your broking business
Not only is debtor financing a boon for SMEs but it can also be a valuable addition to your brokerage. Earlier in the year, MPA spoke to Kevin Wheatley, managing director of Bayside Commercial Mortgages in Sydney, for our commercial broking supplement.
“Financial pressure is the worst pressure any SME can experience,” Wheatley said. “It makes a huge difference if they have a good adviser that can come on board, who can say, ‘Yes, I know you have a problem, but I’ve also got a solution to that problem’.”
Bayside Commercial facilitates around $50m per annum in debtor invoice facilities. “It definitely adds a string to your bow as a broker, and ensures that brokers are perceived as professionals and that people listen to them.”
Westpac’s national manager of trade and invoice finance and specialist finance, Sam Mendelsohn, says the bank currently pays brokers an upfront fee and trail commissions for all referred debtor finance business written. These amounts can vary, however, dependent on the type of transaction and the deal size.
“Brokers are oftentimes well positioned to add value by assisting clients with their cash flow management and liquidity concerns in the day-to-day running of their business,” says Mendelsohn. “Brokers can use debtor finance as a solution that can differentiate them in the market, allowing them to offer a broader, diversified product suite to their clients. This is also a great retention strategy with clients.”
He points out that many brokers are not debtor finance product experts, and it is up to lenders to partner with brokers to provide a comprehensive introduction to the product and how it can be applied. “Brokers work with Westpac’s specialist bankers, who are well placed to help them identify opportunities, in addition to providing education around client eligibility and the criteria with debtor finance facilities.”
A broad spectrum
Debtor finance is not only suitable for many working Australians but can be applied to many different industries, and it’s only growing. According to statistics from the Debtor and Invoice Finance Association, the total debtor financing turnover in 2015 was $64.4bn, and market growth was 2.8% in 2015 compared to 2014.
Mendelsohn recommends brokers gain an understanding of which industry groups are best suited to debtor finance. “These include manufacturing, wholesaling, labour hire, business services, transport and logistics, and service providers to the agriculture and mining industries. It is also a prudent practice that brokers review their client database regularly to be fully aware of their clients’ changing needs.
“A good key to success for debtor finance is identifying clients who offer terms of trade to their customers and who wish to access money tied up in their trade receivables.” - Sam Mendelsohn, Westpac
Bruce Debenham, director of banking and finance at Perks Finance in Adelaide, has a background in commercial lending and a large SME client base consisting mainly of high net worth individuals such as doctors, dentists and orthodontists. He says it is a product that brokers should certainly consider taking on.
“You have to have it in your toolkit – I think it’s important to have a variety of options for your client, and one of them is debtor finance.”
Before his role at Perks Finance, Debenham used debtor finance himself during his involvement in a roofing business start-up. “When I helped a start-up we had customers who were paying on 60-day or 90-day terms and we needed the cash up front to help fund the growth of the business in its start-up phase,” he says. “So debtor finance at that time was an extremely useful product for us.”
Debenham says debtor finance may suit some businesses but not others, and he would recommend it to clients with a strong debtor book. “You’ve got to be very careful in terms of when you’re recommending it to clients, as to whether it actually is a product that suits their working capital requirements. For some businesses, if it doesn’t suit, it can be quite costly, so there are alternatives out there that might be better for them.”
Top tips for adding debtor finance
Mendelsohn says that for brokers considering exploring debtor finance, Westpac has support in place to offer to less experienced brokers, particularly in structuring transactions.
“We can step them through each part of the transaction and even provide separate
training to the broker via our demonstration site,” he says. “We provide education in the form of training presentations and workshops to broker groups, individual brokers and aggregators to help them identify opportunities to deliver funding to businesses without the need for real estate security.
“In order for a broker to offer the appropriate debtor finance solution to a customer, we highly recommend that brokers are fully informed about the structure of the business, size/quality of the debtor book, why the business is looking for funding, financial background of the business, even the industry groups which best suit the product, and really understand the value-add propositions for their clients.”
Debenham agrees and mentions four practical tips for brokers new to debtor finance: have a solid understanding of the client and what they do; understand their working capital cycle; forecast with the client what their business will look like; and understand the various products available from different banks.
BRUCE DEBENHAM: USING DEBTOR FINANCE IN A START-UP
Bruce Debenham, director of banking and finance at Perks Finance, spent 12 months establishing a start-up roofing business in 2009, along with its founder.
“I learnt many things which have proved extremely useful in my first 18 months at Perks,” says Debenham. “Having an appreciation of how an SME works and the various issues/problems such a business faces day in and day out is extremely useful when I am helping our clients with their interactions and dealings with their banks.”
He assisted the start-up in raising $6m in equity from customers and staff and obtaining a further $6m in bank funding.
The $6m comprised leasing of about $4m and debtor finance of $2m. “Although a new company, we had a founding customer base that pledged loyalty and support to the new company once we opened the doors – this assisted greatly when we were working with the bank to get the debtor finance,” says Debenham.
“I developed a fully integrated model with supporting assumptions to demonstrate to the bank how the facility would be drawn and, more importantly, how it would be serviced. The model also demonstrated how and when we would need to draw on the leasing facility.
“In addition to this, I drafted a comprehensive credit memorandum/ application for finance for the bank. With my credit risk background, knowledge of the roofing industry and having experience of cash flow/working capital lending, this helped enormously in terms of structuring the facilities that suited both the bank and us. My banking and, in particular, my credit risk background also helped in our discussions with the bank.”
