Brand New Video: Bank Overdraft Vs. Debtor Finance Training

Posted February 6, 2012

AR Cash Flow went on the road with SV Partners to conduct training seminars on Debtor Finance vs. a Bank Overdraft.

Daniel presented over 2 days, to groups located in Dubbo and Mudgee including accountants, brokers and lawyers. To catch some of the highlights from the seminars see the transcript.

Transcript below.

What are the different ways that you can fix a cash flow problem? There’s many ways to skin a cat. Has anyone got any ideas? Overdraft. Overdraft yes of course, that’s what I’m supposed to be talking about. Overdrafts one way to do it and that’s usually by a bank isn’t it. Any other ways?You can put more money into the business? And how would you do that? In the form of a directors loan or shareholders loan? So director, shareholders loans or really more equity, private. Private Equity – now when I say private equity I mean more personal equity. Any other ways?Debtor Finance – you can get a working capital line against your invoices. Any other ways? A lot of these ways are, when you’ve got a cash flow problem its usually because the business or sometimes if you got good customers who pay on time, you chase your debtors correctly, your just starting to capitalize so you just need more cash.

There’s many ways obviously to raise more cash. Shareholders loan, you can sell more shares to an outside party. I think Leigh mentioned one to me the other day; another good way to raise capital is to sell out completely and get a job. Think that’s pretty much it. nSo yeah obviously we are going to talk about debtor finance vs. the overdraft. Directors loan is great if you can get it, expensive if it comes from outside, you’ve got to give up control. So really the overdraft and the debtor finance are the best ways or really the only two ways to raise working capital.

So does anybody here know how Debtor finance or invoice finance works? So do you want to run me though, its basic. You provide an invoice to a customer. You provide details of that invoice to your debtor financier – you send it over to us. We advance against the invoice and its usually 90% of the invoice. The customer pays the factor and you get the balance of your funds less your costs. Yeah that’s right, customers pays invoice, and then the financier takes the money out, minus discount. Then the balance is paid to the client, minus the fee. Small fee. Not so small. Sometimes its not, yes that’s true, it is depends on who you are with or on the situation. What sorts of business are really suitable? First of all debtor finance I mean that’s how it works but really, what is it? Instead of an overdraft which is a line of credit secured by personal assets, property, where as debtor finance is usually over the invoice. So it’s a different type of collateral.

Has anyone heard debtor finance called by anything else? Factoring, discounting, asset based lending sometimes, borrow based finance but basically factoring is the old term for it where you sell your debts off and the finance company would hound your debtors to collect the money, these days its not really done like that, we generally partner with the client, they collect the debtors, We only start to collect the debtors if there’s a problem, if the debtor ledger gets out too far or if the client wants us to. They come on board and say no we want help collecting the debtors. Sometimes I find the debtor financiers have better systems to follow up on the debtors. Which can result in cost saving for the client because we are now doing it, you don’t pay us any extra to do it. You know lean on the finance company. And also there’s other benefits as well like if you’ve got the finance company chasing your customer, you don’t have to do it and you don’t have to be the bad person anymore. Often we have clients start out where they say I don’t want you to ring my debtors and collect my debtors but that’s for the first couple of months but then after that they’re like look listen can you start to give us a hand here, we just need to get the money in and help us manage it.

OK so that’s debtor finance in a nutshell, where as the overdraft is secured by property, that’s the critical difference here, is an overdraft is secured by property and your wife or husband who’s not working who the property might be in joint names with will sign a guarantee and sign a mortgage and that will be security for your business where as with an invoice finance facility the other partner who’s not involved with the business doesn’t have to sign a guarantee and just using the business as security for the finance.

Has everybody found that in Australia that most people prefer to use an overdraft in Australia we’ve found is that correct. If you go to Europe and speak to our European counterparts they wouldn’t even think about using their property as security for the business cause there partner would just say there’s no way where going to do that, You go off and do what you gotta do, I’m keeping the house separate which most people in Australia, its starting to go a lot more that way because the banks are forcing people out of the overdrafts, unless your the lower risk end of the client spectrum so everyone is being slowly moved across to Debtor Finance.

So what ill do now I’ve got a bit of a little reminder here, ill just draw a chart and point our the differences. We’ll just do a quick comparison table. OK so we’ve got an overdraft vs. debtor finance. (In this section Daniel draws a graph, which I will also draw up below) So I’ll just quickly go through the differences. Has anybody helped a client with a bank overdraft recently or a bank application for finance or made one themselves? So what’s its like in terms of – for an overdraft for bank finance, is it a simple application? Depending on what you’re going to get ? Generally the applications are pretty especially if you are going for a large facility its pretty onerous these days they want 3 years trading history and no overdrawn accounts. Debtor finance – very simple. The reality of debtor finance if you’ve got solid customers and you’ve got paperwork you know that’s what we look at just concentrate on your debtors we can give you the funding

So time to settlement. How long are Banks generally taking these days to settle a loan. I don’t know what is it these days. Could be 6 to 8 weeks even 6 months these days depending on the size. Debtor finance we settle deals in a couple of days, you can get a facility set up within about 24 hours if you need to, from application. So it’s pretty quick

So we talked about this before – business costs. So Business costs, can it lower your business costs? If the debtor financier is helping collecting your debts for you, helping you with your collection side, you can. What does a bank overdraft give you there in terms of service? Not sure they give you anything except for money, nothing these days. What else have I covered? So the main thing which we look for, what about the – this is true for both facilities, it comes back o your point earlier, both the facilities are tied to the asset so with an overdraft if your tied to the asset, the asset being the property, as the business grows and takes off as you know the business gets cash hungry, the value of the asset doesn’t keep up with the business. So they are yes, both tied to asset but with debtor finance it grows with sales because overdraft is tied to your property your basically stuck with what you’ve got and you’ve got to reapply, get a new property, if you don’t have it you don’t have it.

What about profitability? An overdraft – to get money from the bank historically you’ve got to show you’ve got to be very profitable, not profitable you’ve got to show you’re heading in the right direction. What about Debtor Finance? What have you heard about Debtor Finance? Do you need to be profitable to be able to land one of those contracts? My experience yes they want to know that your generating profit. So what I should have said here was, historical profitability, with a bank you’ve got to show profitability, with a debtor finance facility you don’t have to have been profitable, but going forward, looking at your business today and then going forward if we give you this working capital are you going to be profitable? So yes going forward.

So if you’ve been running a business and you’ve had a bit of bad luck, or poor management, one of your customers has gone down under, your biggest major customer has gone under, it puts you in a cash flow hole, you’ve got a big right down, your losing money or a number of your customers have gone down, like in the building game. You’re not going to be able to go to the bank and get funding but from a discounter such as us you would be able to come to us and get funding.

There’s some other things which we haven’t talked about. What about Paperwork? If you go the bank and you try to get money out of the bank, do they look at your proof of debt on your invoices and make sure your invoices are collectable or that the client, you as the client is doing a good job and you can enforce those debts against your customer, They don’t really look at that where as a debtor financier we will focus on t your paperwork, that can be a bit painful for some small business at first cause when we come in to finance the ledger well the main thing we want to know is that invoice that we’re financing against is due and payable no matter what so which brings me to a point you were saying before, we force the client to say well hang on a second your paperwork not’s good enough if your client disputes the invoice once we’ve financed it we’re going to struggle to be able to collect it so we go back to the client and say make a few changes here, so it strengthens their business but also allows us to be able to fund them.

So progress claims –Has anyone had any experience with progress claims, know anything about the issues with it? Well Debtor finance is, most debtor financiers wont finance progress claims, if your financing an invoices that’s part of a contract and there might be liquidated damages or retentions in that contract, it might be a bit of a challenge, so an overdraft you can still fund those and debtor finance, sometimes.

	Overdraft	Debtor Finance
Simple Application	NO	YES
Time to settle	6 weeks – 6 months	24 hours
Lower business costs	NO	YES
Tied to Asset	YES	YES (but grows with sales)
Profitability	YES (History)	YES (going forward)
Paperwork	NO	YES
Progress Claims	YES	Sometimes

Ok so I think I’ve pretty much covered everything I wanted to cover.

You touched on one point I did want to make. It is called Debtor finance, so the key criteria with Debtor Finance, is you need debtors. So has anyone thought of when they don’t have debtors, all they’ve got is stock and we mentioned this before, they don’t have enough debtors but they’ve got orders, they’ve got a contract coming up, they don’t have the work done yet so they cant pull the money out of there. What do they do when they’ve only got purchase orders? They can’t go to the bank, their new, they don’t have the equity, they can’t be bothered jumping through the red tape, their financiers don’t look great but they’ve got the orders. Has anybody heard of Purchase order finance before or looked at that? You’ve heard of that before? Its like a bolt on for debtor finance, so if you don’t have the invoices yet but you’ve secured a massive order to supply Woolworths and they’ve given you a half a million dollars, cause they’re rolling out masters, they want all this electrical equipment, they give you half a million dollars, your suppliers are in china but you cant go to a debtor financier you would come to someone us who’s a bit more entrepreneurial, we’re more of a trade financier, we still do mostly debtors but a handful of our clients do purchase order finance, we take the order as security, we go to your manufacturer in china, we do a letter of credit and we pay them cash when they have finished the goods, goods get picked up from china, delivered to Woolworths, when they’re delivered you give us an invoice we finance the invoice and pay out the trade, so there’s also that. When your using debtor finance and you’ve got good quality debtors you can also bolt onto some financiers, only a handful of us do this, because it’s a lot of work. Debtor finance is administratively heavy but purchase order finance is very very, there’s a lot of work involved but we do a lot of this for particular clients.