The current global economic recession has placed an inordinate amount of financial pressure on all companies. With access to working capital remaining a substantial and now growing challenge for most businesses, especially SMBs, there is a genuine need to consider alternatives to maintain cash flow. Debtor financing, also known as debtor factoring, is one such option.
Access to traditional finance options such as overdraft and loan facilities requires in most instances a comprehensive set of financial statements. However the market downswing has resulted in, among other things, the inefficient management of debtor books, insufficient gearing and poor liquidity ratios. The upshot of all that financial mumbo jumbo is that many debtors are delaying payment in order to better manage their own finances. It hurts businesses, because the resultant cycle of liquidity shortfalls puts further pressure on their ability to conduct business and service overheads.
Quicker Access to Cash
Debtor financing offers small companies easier access to the cash they need to grow and maintain the smooth flow of business. Commonly considered to be an under-utilised tool in South Africa and abroad, debtor finance allows SMBs with reputable debtors to leverage these to access finance. By ‘selling’ either a single or a series of invoices to a bank or financier, companies are able to access the majority of the cash upfront (up to 80%), thereby bridging the 90 to 120 day payment gap that can result after service or product delivery. The remainder is then paid after the debtor has settled the invoice with the bank.
Small operators can use debtor financing to empower their business with the working capital needed for growth. At this point other, perhaps more traditional, tools of finance can be explored. Providers of debtor financing also typically offer other services such as financial decision-making support, general business management insight and step-by-step practical guidance.
Market acceptance of debtor financing remains limited. Estimates of the South African market indicate that fewer than 2 000 companies make use of such services. This is likely to change, however, as businesses seek alternative funding solutions to ride out the economic storm – and as finance houses become more aggressive in the promotion of their products.
It should go without saying, but let’s say it anyway: any form of finance will incur costs and therefore erode margin. So, while debtor finance provides an option to ease cash flow, like any instrument it should only be called upon if necessary. If debtors are increasing their payment windows, it may also become necessary to price for the increased period.
Find out more about the possibility of using this instrument from the Banking Association Debtor Financing Committee, an industry body representing the specialist divisions of commercial banks and other financiers that offer this service.
For a more comprehensive guide of approved members, visit http://www.banking.org.za/debtorfinancing/members/members.aspx