Going with the (cash)flow

NZ Business, Aug 2005 by Peart, Mark

Invoice discounting is becoming by far the biggest factoring product internationally, Williams says.

"It requires a company to have a certain balance sheet strength and trading history to support the fact that it's non-disclosed and we're not involved."

He says it is tailor-made for companies that are too small for a factoring arrangement, or have only occasional cashflow hassles - or both.

The Interface Financial Group has been offering invoice discounting in New Zealand for a year and in North America for 30 years.

Master New Zealand franchisee Chris Reid says in many cases the kinds of companies who access invoice discounting don't want to be bound by a contract requiring their receivables to be tied to a fixed one-year or two-year term.

"Their business might be seasonal and they might only have seasonal cashflow issues. We will buy some of their invoices at a mutually agreed discount - 10 percent initially - and effectively turn their invoices into cash."

Reid says his clientele includes quite a few businesses from the contracting and construction industry.

"We've got a kitchen manufacturer who is just starting to get into commercial work and took on a job to do kitchens for an apartment complex, which was a far bigger job than he'd ever done before. He had difficulty funding the cost of that - the outlay on materials was far bigger than he had ever contemplated.

"Ultimately the job was very profitable so we got the business through his bank. He was up to his limit with his bank and still needed cash to fund this big project."

Among other Interface clients who use invoice discounting are an IT consultant doing a lot of work for the Ministry of Education for disadvantaged schools, and a company that's contracted to Transit New Zealand to put crash barriers on motorways."

"These are small companies trying to grow out of their existing cashflow with no backup capital resources."

Factoring, invoice discounting's bigger brother, allows a business access to capital, "but also you have a company to manage your receivables and they effectively do your credit control," says Reid.

"For that to be realistic you need to have quite a large debtors' ledger. A lot of the companies we're dealing with would have a pretty small debtors ledger. They might only have seven or eight active customers and some of them would be quite a big percentage of that. So they fall outside the general scope of what's traditional factoring."

Reid says Interface is servicing a niche market that "fits in well underneath the traditional factoring company."

So how does it work?

"We sign a company up, get the set-up paperwork done, then the customer shows us the invoices that they want to fund. We agree that the invoices are invoiced to a credit-worthy company so they are able to pay their bills."

Once we do that credit assessment, then we have a very simple buy-sell agreement with the customer where we buy that invoice at 90 percent of its face value.

"Their customer acknowledges that the invoice has been accepted by them and that they will pay us at the end of the receivable cycle, rather than pay our client - and that's what happens."