Considerable uncertainty currently exists in Australia’s debtor finance market. If your business currently uses debtor finance it would be wise to stay close to your current lender and at the same time put in place a Plan B in the event your lender either withdraws from the market or elects not to renew your facility.
ANZ and CBA closed their debtor finance businesses more than two years ago and in March this year the AFR reported NAB is looking to exit the market although nothing official has been heard from NAB one way or another. If NAB was to exit this market, this would leave Westpac as the only Big 4 Bank offering debtor finance.
Debtor finance is an attractive and appropriate funding solution for businesses that need funding to grow but don’t have the property security banks tend to require. In simple terms the beauty of debtor finance is that if you’ve got the invoices, the bank will advance you money, subject of course to credit approval.
And it should be good business for the banks too but if this was the case why would banks want to exit the market? One might conclude that on a “risk/return” basis the bank decision makers have concerns that the product doesn’t stack up. Bad debts from debtor financing usually involve fraudulent invoicing and the non-recourse nature of debtor finance means usually there is no other security like property and plant & equipment for the lender to fall back on. So when a debtor finance deal goes bad, the bank can get caught out big time.
In a “Catch 22” situation, the Big 4’s quest for lower costs has seen a lack investment in specialist staff critical for a truly effective debtor finance business. If the industry is to have a future, it is vital that indepth product and industry knowledge is retained and developed.
The “silver lining” in the debtor finance cloud is the growth of sizeable specialist independent debtor financiers like Scottish Pacific and Bibby along with a number of smaller suppliers including Cash Resources Australia, Fifo Capital, Classic Cash Flow and 180 Group. Many of the staff in these organisations have come from the debtor finance divisions of the Big 4 banks.
In addition, independent second tier banks such as bank of Queensland, Suncorp and Adelaide & Bendigo Bank all offer debtor finance as part of their suite of business banking products.
These lenders have the opportunity of picking up relationships which the Big 4 banks have and will shed but it is currently a sellers market which means only the best deals are being approved. Further these lenders lack the history and critical mass of the Big 4 and there are no guarantees they will remain in the market. Nor would they fit into the Big 4 bank “too big to fail” category.
Whether you are currently using or considering using debtor finance it is recommended you adopt a “hope for the best but plan for the worst approach” because as effective a product as this can be, if it becomes unavailable for any reason, most businesses will find it extremely difficult if not impossible to find equivalent funding elsewhere.