Debtor finance won’t necessarily solve your business’ financial woes.


When times get tough, business owners often blame external factors for their lack of cash flow and productivity—slow-paying debtors, the economy, interest rates, their accountant, and of course paying too much tax. And the answer to these problems is nearly always the same: borrow more money.

But here’s the thing: Unless you understand your business’ underlying issues and take steps to fix them, getting further bank loans, or increasingly popular debtor finance, may well be throwing good money after bad.

Worse still, to get bank loans or other types of finance the director usually needs to provide a personal guarantee. In some cases they may even need to mortgage their property. Putting the family home at risk to relieve the financial pressure in your business may come back to haunt you, and could lead to you becoming bankrupt and losing everything.

So what should you do instead?

Review your business and free up cash

One of the first things that gets reviewed during a turnaround is whether any cash can be freed up in the business. And that’s exactly what you should start looking at. For example, you could:

  • speed up collection times of accounts receivable balances
  • sell surplus assets
  • strictly manage your inventory
  • check whether you’re hitting your breakeven point
  • check your monthly trading margins
  • check you have the right finance for your business
  • set aside money for BAS and super payments
  • reduce your drawings
  • build up a core working capital level—ideally enough cash to cover two months of operating costs
  • ask your accountant to help you find savings
  • prepare a cash flow forecast. Even if this isn’t your forte, have a crack at it (or get help from your accountant). Even something is usually better than nothing.

(You’ll also find plenty more tips in our article, How do you save your business cash flow?)

Finding the money in your own business is always better than arranging for debtor finance without fixing the issues.

When cash flow isn’t the only issue

While reviewing your business, you may discover fundamental issues with its current format or structure. If that’s the case, then you should look into getting pre-insolvency advice or restructuring your business before getting debtor finance.

But if you’ve taken steps to free up some cash in your business and improve its profitability, it may now be obvious how a little more finance can take your business to the next level. And with your business now running efficiently, your bank will be more willing to consider your request.

Where to get the money

Unless you have some personal funds you can invest in your business, you’ll need to get the money from a bank or alternative lender. But loans and other credit finances come at a price. The extra money may relieve your cash flow worries in the short term, but you’ll also have higher ongoing costs—not to mention the interest payments reducing your bottom line.

Understand what you want the money for, and then choose the finance that best suits your purpose.

If you’re just starting out, an overdraft will give you the flexibility you need. If you’re growing or restructuring your business, debtor finance will help you access the cash from your sales faster. Need new equipment? Asset finance can cover the purchase price, and extend the payments over the useful life of the asset.

As for credit cards, they’re fine for day-to-day purchases you can quickly pay off at the end of the month. But with interest rates triple that of other finance, you shouldn’t treat them as loans.

We work closely with accountants, financiers and specialised distressed debt brokers to provide the solutions and advice they need. And we can do the same for you.

If you need help freeing up cash, saving money and managing your business’ cash flow, or want more information about what sort of finance will best suit your circumstances, don’t hesitate to get in touch.





Posted on 30-11-16 in Business.