Factoring and SMEs

Business still at risk from slow trade payments

Although there has been a slight improvement in the speed of trade payments over the last quarter, SMEs continue to be at risk from slow payments according to Dun & Bradstreet's Trade Payment Analysis 2006.

The average payment period for June was still around 54 days (24 days outside average terms of trade) with small businesses the most likely to be affected. Trade debts to Manufacturers were the second slowest debts to be settled behind the mining industry. The Transport and Communications sector continues to suffer from slow payment.

This continued pressure on cash flow highlights the need for a tightly run credit area with all the checks and balances in place. Combining a finance facility which advances cash on unpaid invoices in 24 hours with a specialist credit control, Factoring facilities are growing in popularity amongst small and medium sized businesses without the resources for a large full time receivables area. Furthermore, Factoring enables small businesses to scrap early settlement discounts which reduce the bottom line and benefit from discounts from their suppliers themselves with the cash made available by the facility.

And even with credit under control, businesses will benefit from the faster and more reliable cash flow provided by a Factoring or Invoice Discounting facility. Many fast-growing SMEs suffering from funding restrictions, low liquidity and slow payment are currently using this innovative form of financing to accelerate and maintain their growth.

Decline in confidence creates cashflow crisis for SMEs

Small to medium enterprises (SMEs) are warned to keep a watch on their cashflow with business confidence reaching a low not seen since August 2002 (May 2006, Sensis Business Index).

According to Bibby Financial Services, Managing Director, Greg Charlwood, the sharp decline in confidence during the last quarter coupled with a forecast of an interest rate hike could mean tougher times for businesses in the second half of the year.

“A decrease in business demand coupled with rising fuel prices have left operators pessimistic,” Mr Charlwood said.

“We are now seeing businesses push back their payment date for trade invoices from 30 to 60 days, and for many SMEs this is creating huge cashflow issues.

“What’s more, many economists are predicting the Reserve Bank of Australia (RBA) will raise interest rates, especially now America has,” Mr Charlwood said.

One way Mr Charlwood says business can gain access to the funds they need without having to mortgage their home or take on a bank draft is to use the services of a factor and discounter.

“The beauty of factoring and discounting is that it allows businesses to convert up to 90 per cent of their unpaid invoices into instant cash within 24 hours, enabling businesses to get a continual injection of cash to float their business,” Mr Charlwood explains.

In Australia factoring and discounting is fast growing as the preferred means of finance among SMEs.
Research recently released from the Institute of Factors and Discounters (IFD) put the total turnover for factoring and discounting for the year ending March at $39.4 billion, 21 per cent above the previous year.

Additionally the IFD recorded an increase of more than $2 billion in the March quarter from last year, which in percentage terms is a growth of some 27 per cent.

What’s more they uncovered that 4665 businesses in Australia are now using debtor finance.

Mr Charlwood notes that the consistent growth within the industry is sending a clear message that more and more businesses are seeing not just the benefits, but the absolute need for a steady cashflow.

Sensis index shows need for factoring

Australian business operators must become familiar with the realising of trade debts through factoring and invoice discounting, said Managing Director of Bibby Financial Services, Greg Charlwood, in response to news that cash flow shortages are a major barrier to job creation.
Mr Charlwood’s comments refer to findings in the August 2005 Sensis Business Index which revealed that in Australia concerns about slow payment for goods and services was the fastest growing disincentive to job creation.
“Businesses do not want to commit to higher wages and salary bills if they are not confident of being paid on time by their debtors,” Mr Charlwood said.
Mr Charlwood, who is also the Chair of the Institute of Factors and Discounters Australia and New Zealand (IFD), said many businesses are now turning to factoring and discounting to combat this problem.
“In Australia, turnover for the factoring and discounting industry in 2004 was $9.1 billion.
“This year the industry in expected to grow at a rate of around thirty percent.”
“This consistent growth sends a clear message that more and more businesses are seeing not just the benefits, but the absolute need for a steady cashflow,” Mr Charlwood said.

Property prices stifle small business

With property prices largely stagnant across Australia, small business operators who might otherwise have borrowed against equity in their homes to overcome cashflow lows, will need to start looking to other forms of business finance.

Unless property prices start moving upwards again - which commentators consider unlikely in the immediate term - banks will less inclined (or simply unable) to top up loans to mortgagees.

Debtor finance, or factoring, is the ideal small business cashflow solution for anyone who either cannot, or doesn't wish to use personal assets to support their enterprise.

Factoring allows businesses to access up to 90 percent of the value of their receivables within 24 hours of invoices being raised. Once the debt has been collected, the remaining 10 percent (less a fee) is transferred to the business. The result is a cashflow facility that is completely aligned with the business’ performance and growth, rather than being dependent upon personal liquidity.

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Early disclosure of financial problems is the key to recovery. However, when SME owners start feeling financial distress, many choose to suffer in silence.

A typical SME does not have formal director meetings or a team of legal and accounting advisors giving regular advice. There is no convenient sounding board to formulate a logical plan for recovery. Instead, the distressed SME owner will wrestle privately with his problems over sleepless nights. Adding to the anxiety is usually a fear of retribution from bankers and other creditors if the truth is known.

Small business owners must be prepared to acknowledge their financial problems much earlier and to seek professional guidance before their situation becomes terminal. The corporate doctors often lament that many distressed SMEs would have been able to make a fair recovery had their owners not pretended that "she’ll be right mate".

The message for all SME owners is that calling for a doctor on the day of the funeral is leaving things just a little too late.

A New Financial Year’s Resolution to reduce stress levels

It’s that time again. As the end of the financial year approaches, stress levels among Australia’s SME operators can rise significantly with the mounting pressure of preparing tax returns.

For many businesses, the first quarter in the new financial year can be tough. SMEs tighten their belts to make sure the tax office can be paid on time while, on the flip side, consumers can have a renewed confidence and start spending.

Greg Charlwood, Managing Director of Bibby Financial Services says that at the start of a new financial year, many small business operators are more time poor than ever and realise a healthy cashflow is more crucial than ever.

"An increase in sales at the start of the financial year is great for business, but slow paying customers add to the stress levels of the SME operator now more than ever.

"From time to time we all work harder and longer hours than usual, but there is generally a reason, and that reason is most often financial.

"It only takes a handful of late paying customers and a tax bill in the mail to take stress levels to a dangerous level," Charlwood said.

Research conducted by Bibby Financial Services parent company in the UK showed a startling 67 per cent of business owners/managers had made a wrong decision at times of intense pressure that had cost the company dearly. 24 per cent of those surveyed said that cashflow was the greatest cause of stress in business.

With over 17 years experience with Australian SMEs, Mr Charlwood senses the experience is similar here and advises business operators to take care to minimise their stress throughout the year to avoid problems.

"All of us say we are going to do things to help ourselves, professionally and personally, but often we get caught up in the day to day and fail to stop and make the changes.

"Outsourcing the accounts receivable function is a healthy New Financial Year’s resolution for time poor SMEs.

"The benefits of factoring are numerous – it saves time and money throughout the year and ensures that cash is always on hand to meet important payments, like taxes."

Bibby Financial Services can provide SMEs with access to up to 90 per cent of the value of unpaid invoices within 24 hours of receiving notice that the invoice has been sent. Customer payments are made to Bibby and once the full amount is collected, the remaining 10 per cent, less a fee, is returned to the business.

"With the burden of chasing outstanding invoices taken away, business operators can get through the busy start to the financial year without undue stress, confident that the rewards will be immediate," Charlwood said.

The X-Factor in Debt Collection

Accessing finance can be a real problem for many small businesses, especially if they are growing fast. One option many businesses don't consider is factoring, or cashflow lending as it is sometimes called.

Prompt Payment Discounts Diminish SMEs Bottom Line

Many small businesses are having to forego up to five percent of their bottom line each year to encourage early invoice payment so that they can meet quarterly tax instalments and other overheads such as staff, rent and insurance.