The credit crunch is forcing small and medium companies to turn to alternative financing products to solve their cashflow problems and stay afloat.
The use of debtor financing is exploding. According to data from the Institute for Factors and Discounters, total debtor finance turnover hit $62.8 billion in the 12 months to 30 September, up $10.5 billion or 20% from the previous corresponding period.
There are more than 6000 businesses using debtor finance and the institute expects turnover for calendar 2008 to hit a record $65 billion.
Rob Lamers, chief executive debtor finance provider, Oxford Funding (a division of Bendigo Bank) says he has seen a big jump in the level of inquiry in the last three months given the current economic conditions.
“We’re seeing extended payment terms from debtors and a lot of pressure on casfhlow. Businesses are struggling and they look to methods of improving their cashflow and they are turning to debtor financing.”
Lamer says conditions are particularly difficult in the wholesale trade, manufacturing and labour hire sectors, where companies can be left holding debtors for up to 55 days.
Another reason for the surge in debtor financing is the struggling property markets. In recent years, surging property prices have allowed entrepreneurs to repeatedly borrow against the equity in their homes to fund their business. But that option is disappearing.
“The equity is not there as it would have been in recent years,” Lamers says. “Property prices are remaining stable and borrowers are finding it tougher to deal with banks at the moment.”
There are two popular forms of debtor financing. Confidential invoice discounting involves the finance company “buying” a client’s past and future debts and providing a business with instant funding of about 90% of the amount owed – all without customers knowing.
Factoring works the same way, although customers are made aware that the debtor financier has responsibility for debt collection.
There are a number of conditions that a company will need to satisfy. Debtor financing companies will look closely at the quality of a company’s debtor ledger (particularly the viability of its customers and any existing deals with various buyers), the spread of the debtor ledger (how reliant the company is on one or two customers) and the aging of the ledger (how long it takes customers to pay).
Debtor financing companies also typically require director guarantees before they take a company on as a client.
“We look for the owners of the business to stand behind the business,” Lamers says.
Lamers believes debtor financing turnover is likely to pass $100 billion a year within three years given the economic slowdown.
“The fact is cashflow is going to be tight for business and that is when we expect to see our industry prospering. We’re still at the early stages of this industry.”
Related stories:
Related Items :
