So let me answer the "expenditure" question directly by saying that debtor finance will normally cost a small percentage of the value of invoices financed. However, given that debtor finance facilitates revenue growth, the revenue or "top line" impact of debtor finance should not be discounted when the "cost" of debtor finance is being assessed.
Recently I spoke with a prospective client who was a business services provider. His Gross Profit Margin was 40%. He was turning over $300,000 per month. He had very real potential to double that turnover - but needed funding to do so.
I estimated that a debtor finance facility for his business, given its circumstances and debtor collection cycle, would cost him in the vicinity of 2.5% of invoices financed. His accountant thought that this was expensive.
Lets assume that a doubling in sales is realistically achievable. The client is now trading off:
- Using my services and having a business that grosses 37.5% per month on a turnover of $600,000 per month, or;
- "Going it alone" and maintaining his margin at 40% - but 40% of $300,000 in revenue per month.
The illustration below shows the clients existing GP, his potential additional GP (GP foregone if he decides not to grow) and the debtor finance fee. The whole "pie" represents total sales of $600,000 per month.
The chart illustrates that in the event the client takes his accountants advice, he runs the risk of missing out on $75,000 in gross profit per month!
So the cost of of debtor finance, in expenditure terms, is negligible when weighed against value creation debtor finance facilitates.
What advice would you give this prospective client if you were his advisor?
