Start-ups increasingly turning to debtor finance

Debtor finance is becoming increasingly popular among start-ups due to economic uncertainty and rising interest rates, a new study shows.

According to the latest figures from the Institute for Factors and Discounters, debtor finance in the September quarter soared to $15 million, up 6.3% on the June quarter.

The biggest users of debtor finance in the September quarter were wholesale trade at 31% of total receivables, followed by manufacturing at 21%, property and business services at 11% and labour hire at 10%.

Rob Lamers, chief executive officer of debtor finance specialist Oxford Funding, says the recent wave of rate rises is starting to hinder the ability for businesses to pay suppliers on time.

“[This is] creating an uncertain cashflow climate for many businesses across Australia. This has, to some extent, attributed to the healthy 6.3% growth in debtor finance this quarter,” he says.

According to Lamers, debtor finance is ideally suited to start-ups because cashflow is typically a major hurdle for any business starting up.

“If a business is starting up and providing credit terms to other businesses, we can pay those invoices while the business waits for them to be paid,” he says.

Lamers says when providing debtor finance to a business, organisers look at the business in its entirety, including its business plan, viability, manageability, and the level of experience among key staff.

“The experience of the people [behind the business] is important. Start-ups may not have had previous business experience but industry experience is considered important to us,” he says.

“It can often be difficult for start-ups to gain credit from a bank without a proven track record. We don’t necessarily need 12 months of trading [in order to provide debtor finance] – we look forward and we look back, whereas financers tend to look at historical trade only.”

“For small businesses, ‘cash is king’ is a common saying. Debtor finance is a viable solution because you don’t need to put your house up for credibility.”

“It’s therefore a very important tool that many SMEs starting up should look to utilise.”

Lamers says a two-week period is fairly typical of the time it takes for an organisation to make a decision as to whether or not it will provide a business with debtor finance.

“This includes everything from meeting the people and seeing the business operations to analysing the information and providing a letter of offer,” he says.