Small businesses are turning to debtor financing to solve cashflow problems, with the total value of receivables finance in the December quarter jumping 14% to reach a record $17.9 billion.
But SMEs are being warned that debtor financing – the process by which a finance company “buys” your invoices and pays you about 80% to 90% of the invoiced amount – will not rescue a struggling business from the threat of collapse.
New figures from the Institute for Factors and Discounters of Australia and New Zealand show that total receivables finance loaned to business in 2008 jumped 18% to $65 billion.
IFD chairman Brendan Green says the biggest users in the December quarter were the wholesale trades sector and the manufacturing sector. Close to 6000 businesses took out debtor financing in the last three months of 2008.
“The rapid growth of the industry has been driven by a variety of elements, including lengthening debtors’ days, difficulty accessing credit, and an increase in the number of medium-to-large corporations with annual turnovers of $250 million and more using this form of finance,” Green says.
Rob Lamers, chief executive of debtor finance provider Oxford Funding, says the popularity of debtor financing has grown as businesses search for solutions to cashflow problems.
“We’ve found that since November demand has increased even further, and that’s a reflection of the current economic environment. Things are obviously tight for small business, cashflow is tight and businesses are going to look for ways to support their cashflow.”
Lamers said that Oxford is hiring new workers to cope with the growing demand of the practice.
But he warns businesses that debtor financing must only be used in the right circumstances.
“It’s got to be for the right reasons. If the fundamentals of the business aren’t there, debtor finance is only a band-aid solution. The underlying business needs to be sound and profitability needs to be there.
“Debtor finance is for growth, but some business may want to use it to get through these tough times. It’s certainly a product that needs to be considered as an alternative to property finance.”