Debtor financing – a valuable alternative

A recent report by the Institute for Factors and Discounters (IFD) found that businesses operating in the wholesale and manufacturing sectors had the strongest uptake of debtor finance in 2009.

A recent report by the Institute for Factors and Discounters (IFD) found that businesses operating in the wholesale and manufacturing sectors had the strongest uptake of debtor finance in 2009.

Five years ago, the manufacturing sector accounted for 18% of factoring turnover. In December 2009 this figure increased to 24%, making the manufacturing sector the largest single user of factoring in Australia.

There are several reasons why manufacturers are increasingly integrating debtor finance into their business:

Firstly, the credit crunch has changed the landscape and manufacturing businesses can no longer rely on banks for financing to help smooth cash flow shortages, or are unwilling to put up property security to access it.

Secondly, manufacturing companies are finding that their customers and suppliers are taking longer to pay for goods and services. A recent report by Dun & Bradstreet, Trade Payments Analysis, January 2010, revealed an average 53.8 days to make payments by companies from the manufacturing sector.

Thirdly, with a lot of cash tied up in raw materials, machinery, stock and inventory, manufacturers rely heavily on cash flow as a source of additional liquidity.

What is debtor finance?

Debtor finance, also referred to as invoice financing or cash flow financing, is designed to improve cash flow and increase working capital available to businesses to overcome cash shortages locked up in unpaid invoices.

It converts up to 85% of the value of each sales invoice into cash within 24 hours. Once payment has been received on the invoice the remaining 15%, less a service fee is returned to the client.

It is an effective way to speed up cash flow, advancing cash against unpaid invoices to providing funding for the cash gap between invoicing and payment.

Debtor finance can also offer an optional sales ledger management service, issuing statements, handling cash allocations, collecting outstanding payments and maintaining detailed accounts of the business’ transactions. This helps free management time to focus on moving the business forward.

Factoring turnover across Australia rose slightly to $3.2bn over the 12 months to the end of December 2009 from $3.1bn the previous year.

Overall the industry has enjoyed strong growth over the past decade averaging a 20% increase in turnover each year as the benefits of invoice financing have become more widely known and appreciated.

Outlook for debtor finance sector

Demand for the factoring sector is expected to continue to grow by around 20% this year as conditions remain tough for SMEs and funding is scarce.

GDP growth for 2010 is forecast to be 3% and unemployment is expected to fall by 4.75% by the end of 2010 according to the NAB Monthly Business Survey & Economic Outlook report for January 2010.

The recovery in the jobs market will assist with fuelling business growth and consequently funding growth. However it is evident that pressures still remain. Insolvency appointments rose 2.8% over 2009, which is 20.9% above the level recorded in 2007 prior to the global financial crisis.

This indicates that credit finance for businesses will remain in short supply for much of this year and debtor financing will increasingly become an option for small to medium sized businesses who remain in short supply and are seeking a flexible line of credit to support sales growth.

* Greg Charlwood is Chief Executive Asia Pacific, Bibby Financial Services.