Helping SMEs get cash in hand
Invoice factoring has had a bad rap in the past, but the industry is growing and financiers are promoting it as a way for small businesses to get cash in hand fast.
Factoring, or invoice financing as it is also known, is the practice of businesses borrowing short-term against invoices they issue, allowing them to access the money immediately to keep cashflows healthy.
It isn't cheap, but it is on the rise driven in part by reduced availability of traditional forms of finance.
In New Zealand businesses are waiting an average of 43 days to be paid by other companies. In Australia the wait takes nearly eight weeks.
Owner of factoring firm Working Capital Solutions (WCS) Edward McKee Wright said the factoring market was big in Australia and the rest of the world, but it was still in its infancy in New Zealand.
McKee Wright had been working in the factoring business for about 20 years.
"I've been pushing and pushing the factoring wheelbarrow."
Annual factoring turnover was $78 billion in Australia last year. New Zealand's turnover was less than $1b last year.
Experts estimated less than 1000 New Zealand SMEs were factoring.
There was definite room for growth in the Kiwi market with more than 97 per cent of New Zealand businesses falling into the small to medium-sized business (SME) category, McKee Wright said.
More than 70 per cent of small businesses expected cashflow to be an issue to their operations, he said.
And about 60 per cent of New Zealand businesses did not make it past their fifth birthday.
"Profit is a matter of opinion, but cash is a matter of fact."
Grant Thornton privately held business partner Paul Kane said business owners have been forced to look at alternative ways to solve their cashflow problems.
"Pre-2008 it didn't matter. Banks were giving out money, literally."
Bibby Financial Services head of sales John Blackmore said banks would often not lend to young companies without good profits.
"We are still going to do the deals that the banks don't want to do."
Bibby factored about $50 million of invoices in New Zealand each year.
New Zealand business owners traditionally used their homes as security so they could borrow from the bank, Blackmore said.
Invoice financing had only recently gained recognition in New Zealand, despite starting in the United States in the early 1900s.
New Zealanders have held a negative view of factoring in the past, Kane said.
There was the assumption that if someone else was running the company's debtor book then it was in financial strife, he said.
A lot of Kiwi SMEs did not know how factoring worked, he said.
But with more reputable companies and bigger players, including BNZ and Heartland, coming into the mix, factoring was gaining momentum.
Kane said SMEs needed to seek good financial advice around their debtor financing.
"It's sort of the New Zealand way to just muddle through."
People needed to understand there were risks, and that like any other debt financing tool it was an alternative, he said.
It was not a good option for companies that were in decline, Kane said.
"It's probably going to put them further into [decline] to be honest."
SMEs needed to be aware that there were risks associated with all forms of debt collection, Kane said.
It's more expensive than a bank overdraft, for example.
There's generally a fee of about 2 per cent of the sum borrowed and the interest rate on the loan is similar to bank rates.
New Zealand factors offered nonrecourse factoring when the factor takes legal responsibility for the debts, so if a debtor cannot pay the SME does not need to refund the advance from the factor as it is covered by insurance.
Blackmore said businesses needed to have an exit strategy when they had come to the end of their growth stage and started turning a profit.
Sales training and recruitment company Sales Star was struggling with cashflow due to slow-paying clients before it started using invoice factoring.
Sales Star chief executive Paul O'Donohue said the company, which had been around for the past eight years, had been using invoice factoring for six years.
The company had grown 247 per cent in the past two years, O'Donohue said.
"Growth sucks cash."
O'Donohue had factored $30,000 worth of invoices.
Factoring had put fuel in Sales Star's tank to take care of general business, he said.
"Cash is king and is the lifeblood of any thriving organisation."
It took away the worries of paying salaries, rent and other essential business expenses on time, he said.
SMEs did not use factoring enough, O'Donohue said.
"Maybe they are afraid of the rates."
Factoring was value for money, as it meant getting cash quickly, he said.
"I don't mind discounting an invoice slightly to get the cash in faster. I view this as opportunity cost."