The new Budget requires certain businesses to pay tax monthly rather than quarterly. This means some businesses may have to pay tax before they receive payment from their customers, creating cashflow issues.
This can be particularly problematic for growing businesses already struggling to pay creditors because of payment delays by their own clients. One solution to such cashflow issues is receivables financings (including invoice discounting).
Receivables financings can allow businesses to meet such tax payment obligations as well as freeing up cash for, among other things, working capital, capital expenditure and acquisition purposes and for generally continuing to develop their business without having to wait for debtors to pay invoices. A receivables financing may be particularly relevant where an overdraft facility would otherwise be inadequate. It can be structured to allow increased finance to be made available in line with increased sales without the original terms having to be amended.
Such financings are particularly relevant where a business is required to pay its suppliers upfront or meet other payment obligations.
The business can then repay its financier as and when the debtors pay their invoices.
Depending on the arrangement reached with the financier, clients of the business do not need to be informed of the financing and security arrangements (as opposed to more traditional “factoring” arrangements), so those clients continue to liaise with their usual contact at the business rather than a representative of the financier. Typical facility limits can be up to 70 - 85% of the receivables or invoices financed and there are a number of financiers who offer to make funding available as quickly as the next working day.
The financing can be non-recourse or full recourse with the former prohibiting the financier from seeking recourse against the business if a client fails to pay an invoice. Further, the security provided to the financier can be the usual all assets security or it can be limited to security only over those receivables that are financed (although this is less common for mid-tier businesses). A number of factors will determine which is the most appropriate and it is worth noting that these may also impact on the pricing of the finance.
One additional advantage of a receivables financing as opposed to a corporate cash advance facility, for businesses with assets in New South Wales, is that it might not attract New South Wales mortgage duty although we recommend that specific stamp duty advice is taken on a case by case basis.
If receivables financing is something that might be of interest to your business, we have a number of contacts both in Australia and overseas who make such financing available. Please feel free to contact us if an introduction would be helpful.