What Australia can learn from Debtor Finance in the UK
Debtor Finance is a popular cash flow solution worldwide, but Australian businesses have been slower to adopt the practice than some of their counterparts overseas. We examined Debtor Finance trends in the UK to see how they compare with attitudes in Australia. Read on to find out what we learned.
Debtor finance is a great way for businesses to overcome periods of uncertain cash flow by leveraging the value held in unpaid invoices. But attitudes towards debtor finance vary from country to country, with businesses in some nations quicker to turn to these solutions than here in Australia.
In the UK, debtor finance and asset-based lending stood at £23.4 billion (AU$43 billion) in the December quarter last year, according to UK Finance. Meanwhile, the equivalent figure is $7 billion for Aussie firms, the latest figures from the Debtor and Invoice Finance Association of Australia and New Zealand (DIFA) show.
This can partly be explained by the relative size of each country's economies. Yet, Reserve Bank and DIFA figures published by My Business show debtor finance accounts for just 3.9 per cent of Australia's gross domestic product, compared with nearly 20 per cent in Britain.
Why do British businesses favour debtor finance?
There are a number of potential reasons that debtor finance is a more popular solution in the UK. First, British businesses could simply be more aware of debtor finance as an option.
"[Debtor] finance continues to be the preferred method of business lending for SMEs in the UK, outstripping overdraft lending to SMEs," said Aaron Hughes, Managing Director at Equiniti Riskfactor.
"It is regarded as the optimal way to fund business growth because lending is directly linked to, and secured on, their customer's sales ledger, and so it's continued growth over the past few years is unsurprising."
Moreover, the British government has made a number of regulatory changes to help SMEs access alternative finance. In 2016, the Small Business Enterprise and Employment Act made it a legal requirement for banks to refer SMEs they turn down for commercial loans to an alternative finance provider, including debtor finance firms.
Are more Australian SMEs turning to debtor finance?
Australian businesses appear to be becoming more aware of non-traditional lending options, with a recent KPMG report showing the country is the second-largest market for alternative finance in the Asia-Pacific region.
The sector grew 53 per cent from 2015 to 2016, reaching $785 billion. Last month, FinTech Australia Chair Stuart Stoyan said SMEs are exploring a range of new avenues to ensure future growth, including unlocking the value of unpaid invoices.
"Fintech lending and finance firms are increasingly providing the capital that these businesses need to invest and grow, through a focus on innovation and customer needs," he explained.
Are you ready to consider debtor finance as cash flow solution?