Factoring Insights

Factoring and working capital - Asset-Backed Finance

Invoice finance a growing business finance trend

Small to Medium sized Enterprises (SME) are the lifeblood of the South African economy but they are heavily dependent on the banking sector for working capital. Regardless of whether businesses are feeling the slow-down effects of the global recession or are fortunate enough to be caught in an unexpected wave of growth, they all need access to funding. The worldwide credit crunch has affected these SME's with particular voracity. The more restrictive lending criteria imposed by the traditional financial institutions has left many business owners up the proverbial creek without a paddle.

South Africa's recovery, as in the rest of the world, depends on businesses being able to access the finance they need to stabilise and of course, to grow. Whilst many of the obstacles to economic recovery appear daunting, a creative approach with "out of the box" thinking can produce results.

Traditional banks are sure to maintain their credit-restrictive mindsets, even with business confidence returning. SME's would therefore be well advised to explore alternatives to resolve credit shortfall problems. Asset backed trade finance, factoring and debtor finance arrangements should be seriously contemplated. Over US$1 trillion is transacted each year globally through these products offered by specialist financial institutions. In South Africa, the number is closer to R25 billion.

Such arrangements acknowledge the fluctuating financial needs for businesses in varying stages of growth. Quite opposite to the rigid overdraft or loan agreements from traditional banks, these financial products release working capital as the need arises in the natural ebb and flow of turnover. By way of example - when an SME secures a contract to supply stock to a major corporate retailer, the joy of landing a new account quickly turns to a financial nightmare as the 90 day payment cycle begins to play havoc with the cash flow of business. Factoring type arrangements can smooth that cycle, ensuring the business survives any growing pains.

Recent studies conducted in Europe and, more particularly, in the United Kingdom. have shown:

  • That lending from banks to businesses has fallen sharply since the financial crisis.
  • That credit availability needs to increase as the economy recovers, but an analysis suggests that bank credit may not grow to the extent required to support sustainable economic recovery. An increase in the provision of other forms of finance to businesses would help address this potential shortfall.

The studies also identified key behavioural traits which prevented businesses from taking advantage of alternative forms of funding:

  • A general lack of awareness by smaller businesses to alternative sources of finance outside of the existing relationship with their banks (by way of example, factoring and asset-backed working capital);
  • A lack of the financial expertise required to assess the appropriateness of alternative sources for the borrower; and
  • A lack of confidence in their ability to secure these alternative forms of finance.

Our task, as a financial institution specialising in working capital asset-backed finance and factoring, is to:

  • Show SME's that a solution exists and that we at Merchant Factors offer tailored factoring and asset-backed working capital solutions;
  • Educate our prospective partners, the borrowers as to how these unique products operate;
  • Assure the borrower that they are able to secure this form of finance quickly and easily.

Businesses need access to finance from specialists that are able to see beyond the balance sheet. Releasing cash tied up in the debtors cycle promotes business survival, stabilisation and success without sacrificing equity.