Going with the (cash)flow

NZ Business, Aug 2005 by Peart, Mark

Is a tight cashflow situation putting the squeeze on your company's progress? Perhaps it's time to take a serious look at debt factoring and turn on the money tap again. Mark Peart reports.

Cashflow continues to be the number one issue for most businesses that provide trade credit, and are looking to grow.

So, not surprisingly, increasing numbers of SMEs (small and medium enterprises) are turning to debt factoring - an arrangement by which a debt factor company provides 'full service' or 'cooperative' control of the debtors ledger, and advances funds on the value of money owing - thereby significantly strengthening a business's cashflow.

It is a concept that is still relatively new to business owners, but is gradually catching on.

Dave Cooper, New Zealand manager for Scottish Pacific, a major player in the factoring market, says every product his company sells is based solely around factoring and 'invoice discounting'.

These are both forms of cashflow finance, both using the value of the debtors' ledger to produce that cashflow.

"With full service factoring, we generally have an agreement with our client for a year. Over that period he will submit all of his invoicing to us plus his existing ledger," says Cooper.

"We, on the ledger that he hands over, and all the invoicing he passes to us on a weekly basis, will do all the administration. We'll send out statements, we'll send out reminder notices, all the cheques will come to us, so we'll apply all the cheques to the customers."

"We also run what we call an open-item debtors ledger, so we apply the cash to the invoices that are being paid off, so basically it acts as a reconciliation mechanism as well."

Each client has a credit officer assigned to their file, who will co-ordinate the debt collection. Depending on how early in the day the client forwards the invoices to Scottish Pacific, funds can be drawn down later that day against them, through the Internet.

Cooper concedes factoring can be a high-risk practice, especially as far as fraud is concerned. "If you get hit with a fraud, particularly if there is collusion involved, then you can churn through quite a bit of money."

"We are quite conservative, I have to say, with the type of deals we'll take on. We do quite a bit of research. We look into their tax position, their creditors' position, their accounts to make sure they're going pretty well. We'll reference some of the customers, we'll reference some of the suppliers. The last thing we want to do is be involved with failure - it's not good for the company and it's not good for the industry."

Scottish Pacific's New Zealand operation has grown from five employees to 28 since Cooper started with the company 12 years ago. "We've experienced growth every single year."

Proactive debt collection

So why do people decide to contract out an integral part of their business and entrust it to a bunch of strangers?

Cooper: "A lot of people just don't like having to do their own collections. A lot of small businesspeople in New Zealand don't really start off as businessmen.

They find themselves in the position of having to be a businessman."

Cooper says New Zealand businesses tend to be reactive in their debt collection, only calling people when they need the money.

"Scottish Pacific comes in and makes it a more formal process. We ring at regular times, we do follow-up calls."

Clients can log in through the Internet to Scottish Pacific's computer system and go to any one of their debtors and see the contact the company has had with them.

"They can see that on the 28th of June at 9.45am Dave talked to Jim, and this is what Jim said."

Cooper says unless small business people have a property as an asset, banks are no longer into debenture-style lending.

"A lot of people, simply because they've got the impetus of the money straight away, can immediately get huge discounts,"

Cooper has one client who can get 40 percent discount on paint, for example, because he can pay straight away or within seven days.

S.H. Lock business development manager Jason Williams says factoring accounts for about a quarter of his company's lending - the rest is working capital or trade finance-related.

Williams says factoring as a concept is gradually becoming better known. In New Zealand, factoring has been provided by companies which are independent of banks, unlike overseas where it's big business and banks have large marketing networks to draw on.

"That has in a way resulted in New Zealand falling behind the rest of the world. None of us has the marketing budgets to go out and talk to every business owner that we might want to. "Slowly and surely, the profile of factoring as a product has built up, and we're getting to the point now where people are asking us about factoring, rather than us telling them about it."

Invoice discounting

Williams says growth in the sector won't come in what's known as full service factoring, where the ledger is physically administered, but more in 'invoice discounting'.

"That's an undisclosed facility where 80 percent of the debt is paid out up front, but we aren't actively involved in the management of the ledger."