Building business without waiting for customers
Despite the turbulence created by the global financial crisis, it remains smooth sailing for business growth across Australia.
In 2008, there were 1668610 registered companies, according to the Australian Securities and Investment Commission (ASIC). That’s nearly 67000 more than at year’s end 2007.
While there are plenty of reasons to start a company, there’s almost as many to need financing. The question for business owners is how best to go about it.
Invoice financing, or factoring, is one option that for years has been saddled with the stigma of being the absolute last resort for business finance.
Accountants such as Reckon Accredited Partner Tony Pollard of Amable Management Services Pty. Ltd., in Burwood, NSW, however, say the mentality is shifting.
“Business owners are seeing that it helps keep their working capital under control,” he notes, “particularly as [customers] are now taking longer to pay.”
Others are buying into it as well. The Institute of Factors and Discounters in Sydney estimates annual turnover of approximately $65 billion for 2008 compared with just over $50 billion in 2007 and only $5 billion in 1997.
Invoice financing involves a financial institution or discounter, purchasing the business’ book of debts, typically for those customers who have bought goods or services on credit terms, from the business owner.
The benefit to SMEs is they have immediate capital to expand their business without having to wait for customers to pay the outstanding balance. Accordingly, customers are unaware that a third party is now involved.
Factoring, which is largely synonymous with invoice financing, operates in a similar manner though the sales accounting function is provided by the factor or lender. In this scenario, the third party manages the sales ledger and assumes the risk for all accounts.
Both invoice financing and factoring can be particularly valuable with recent changes to consumer payment terms ─ to 56 days from the standard 30-day period ─ which often leave business owners short on capital and unable to capitalize on growth opportunities.
Through invoice financing, business owners receive cash totalling between 75 and 90 per cent (depending on the lender) of the invoice’s value as soon as it is issued to the customer. The lender’s fee varies from 1 to 3 per cent and the balance of the invoice is paid to the business owner when the customer settles the debt.
The financing is most often used when businesses need to increase their cash flow and/or grow the business. For instance, it allows the SME to purchase equipment instead of leasing it. In addition, it can be valuable when acquiring other businesses, management buyouts or when business owners have limited access to equity.
By improving cash flow, there’s no need to offer early payment discounts and the headaches of chasing tardy customers for payment are removed. Plus, financing costs are tax deductible.
Invoice financing compares favourably with traditional overdraft-style bank funding which tends to set a monetary limit linked to the security value of your property and personal assets.
Related posts:
- Business growth funding options post-GFC
- Factoring Facts
- Factoring Facts
- Understanding Debtor Financing
- Strong demand for invoice financing to continue
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Highly informative article which would be very useful for someone looking to startup their own business. With the economy in such a mess at the moment it is harder than ever to make a success of a new business venture and financing is such an integral part of it.
I agree with the article in that a solid and reliable accountant is a must. You have to make sure that funding and lending is viable and can be paid back appropriately.
Great topic, Factoring used to be a risky path to take for small business given the control the providers would have over them, often requiring personal guarantees or property. It was also difficult to reestablish your business and trade without factoring.
The financial institutions offering factoring these days have improved their reputation and small business can be a benefit not just to help cashflow, the time saving and invoice management, but to allow growth without costly, inflexible overdrafts.
We are seeing a large proportion of clients taking on our full service factoring product largely due to the collections service that is provided with a full service facility. Chasing debtors for payments and the task of sending out invoices and making sure the debtors are receiving them correctly needs to be done properly and consistently. The most common theme I see amongst very small businesses is their inability to consistently make those important follow up calls to make sure things are being paid on time, due largely to the time and cost of the task.