March 30, 2021 2:02 PM

It’s all in the timing – managing the cash gap with trade and debtor finance

It is well known that the major handbrake on the growth of the average Australian SME is a shortfall in working capital. Put simply, pressures on an SME’s working capital occurs as a result of a difference in timing between having to pay for something and getting paid for something.

In accounting terms, this is known as the cash conversion cycle. The 3 key contributors are:

  • Time taken for a business to collects its receivables
  • Time taken for a business to turn over its inventory
  • Time taken for a business to pay its creditors  

From the day inventory is purchased to the time it is sold to a customer, there is a void of negative cash flow to be filled. Similarly, once a business makes a sale, the time it takes to convert the receivable to cash represents another gap.

Debtor Finance

Debtor finance is a funding solution which enables a business to access cash tied up in its accounts receivable.

Trade Finance

Trade finance gives businesses access to a revolving line of credit to pay for both local and domestic suppliers

How do They Work?

Example 1: Furniture Wholesaler – Furniture Aust Pty Ltd (Fictional) – “FA”

FA is a Sydney based furniture wholesaler that imports stock from overseas and then on sells to furniture retailers and home department stores. Once Furniture Aust Pty Ltd purchases stock from its suppliers, it takes 30 days for the stock to arrive and then another 30 days for FA to sell the stock. Additionally, once the stock has been sold to a customer, the customer takes up to 90 days to pay FA. Thus, there is a cash gap from when the stock has been purchased to when the money is received for a sale of 150 days – 60 days from when FA has to pay its supplier and an additional 90 days waiting for the customer to pay once it has completed a sale

FA can use Moneytech's trade finance facility to purchase stock. Moneytech’s facilities don’t require FA to make full repayment for more than 90 days, thus addressing the gap between having to pay for stock and having sold the stock to its customers.  FA can then make use of a debtor finance facility to access cash tied up by the invoice raised to FAs customer for that same stock, thus addressing the gap between having raised an invoice to its customer and actually receiving payment against that invoice.

This is a common example of how a business in the wholesale industry can take advantage of a trade and debtor finance facility in order to fill their ‘cash gaps’, free up liquidity in the business and assist with the working capital.

Example 2: Refrigerated Transport Company – Fridge Trucks Pty Ltd (Fictional) – FT

Another industry which makes great use of a debtor finance facility is freight and logistics. FT is a transporter of refrigerated goods, with depots across the country. While FT is not required to purchase stock, it has high variable costs such as wages and fuel and having cash tied up in accounts receivable can apply extra pressure in paying for these items.

FT is required to pay for fuel weekly, and its wages fortnightly. However once a delivery is made, it takes a customer 90 days to pay for the invoiced raised. Thus, in the time it take0s Whilst FT is waiting for its customers to pay, it has had to make multiple payments to key suppliers including fuel and also drivers wages etc. FT can use a debtor finance facility to access the cash tied up in their accounts receivable and use this to pay for operational expenses such as wages and fuel, thus addressing the pressure on their cash flow.

Almost all businesses face pressures on their cash flow and cash conversion cycle, however with the effective use of a quality debtor or trade finance facility, these pressures can be alleviated

Want to find out more?

If you would like to hear more about how we can assist your business grow, check out our videos:

Debtor Finance | Trade Finance


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*This information does not take into account your personal objectives, circumstances or needs. Consider its appropriateness to these factors before acting on it. Read the disclosure documents for your selected product or service before deciding whether to purchase them. ABN: 77 106 249 852 | AFSL: 421414