Slowing economy fuels boom in debtor finance

Cash-strapped companies are increasingly turning to debtor finance as the economic slowdown starts to bite.

Cash-strapped companies are increasingly turning to debtor finance as the economic slowdown starts to bite.

The latest data from the Institute for Factors and Discounters shows that total debtor finance turnover for 2007-08 reached $60 billion, an increase of $10 billion or 20% from last year. The institute says there are now 6000 businesses using debtor finance in Australia.

Nowhere is the need for debtor financing greater than in the wholesale trade sector, where payment terms have stretched to 58 days.

Rob Lamers, chief executive of debtor finance firm Oxford Funding (a division of Bendigo Bank) says wholesale traders have been hit hard by the fact that their biggest customers – retailers – are struggling.

“There is a drop in retail spending and consumer confidence. With retail being down, the first thing they are going to do is cut back on payments to suppliers. It’s a long time for these businesses to wait.”

The next most common users of debtor finance are manufacturing (23%), property and business services (8%), labour hire (8%) and transport and storage (7%).

Confidential invoice discounting – the process by which a finance company “buys” your past and future debts, and provides a business with an instant funding of about 90% of the amount owed without customers knowing – is the most popular and fastest growing form of debtor finance.

“People have seen that as a great way to fund their cashflow without disruption to their business,” Lamers says.

Factoring – which is essentially the same as invoice discounting but customers are made aware that the debtor financier has responsibility for debt collection – is the next most popular product.

Lamers predicts industry turnover could top $100 billion a year within three years as the economic slowdown forces companies to look for ways to bolster their cashflow.

“It’s been growing consistently for the last 10 years at about 20% a year,” he says.

“Businesses are seeing debtor finance as a real tool to fund their cashflow and the banks have put much more emphasis on these products. We are really just catching up with the US and Europe, where debtor finance is a mainstream product.”

The cost of debtor finance has halved in the last 10 years, thanks for improvements in technology and a flood of competition. There are now 17 debtor finance companies, compared to just three a decade ago.

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