Factoring In The Cost Of Business Success

Invoice Financing
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You’ve got to spend money to make money. It’s a universal truth that is perhaps never more accurate than it is during the holidays, especially for small businesses. When orders rise, so does the cost of fulfilling those orders and keeping a company running.

According to Chairman of the Debtor and Invoice Finance Association of Australia and New Zealand (DIFA) Wayne Thomason, this seesaw of cash in, cash out is giving rise to the success of invoice financing in this part of the world.

In fact, the economy post-global financial crisis may be proof of this. Businesses are beginning to feel the positive impact of a healthier, more lucrative market; yet, according to DIFA figures, invoice financing is on the rise. It seems counterintuitive: If the economy is better, why are businesses turning towards a type of borrowing often associated with last-minute cash flow troubles?

“A common misconception is that factoring is simply a funding solution to overcome short-term cash flow constraints,” Thomason recently told PYMNTS. “The truth is that factoring is an ideal funding solution for growing businesses, as it can provide cash flow to fund growth.”

DIFA recently released the latest statistics about the invoice financing market in the region and found that debtor finance turnover for the third quarter of 2015 has hit A$15.8 billion (about $11.5 billion). That represents a nearly 15 percent growth in the factoring market compared with the previous quarter and, on a yearly basis, a 3.4 percent industry growth in the 12 months to Sept. 30, 2015, compared to a year before.

When the group released these figures, Thomason issued a statement noting that factoring has become particularly successful compared to other small business loan products on the market today.

PYMNTS asked Thomason to elaborate on why this might be, especially as the world’s economy continues its recovery.

He explained that, for example, a period of high growth for an SME is “always welcome.”

“But a sales surge means more money spent on inventory to service that stronger customer demand,” the chairman added, noting that other expenses, like investing in high-quality staff and wages, are also a direct result of a growing business.

[bctt tweet=”‘A sales surge means more money spent to service that stronger customer demand.'”]

“So, an argument could be made that businesses grow in a strong economy, and growing businesses increasingly use factoring to help fund expansion,” Thomason said.

DIFA’s research pinpointed the businesses that are fueling factoring growth, and as it turns out, they’re largely in the B2B sector. According to the analysis, the wholesale trade industry saw 38 percent of its receivables fueled by invoice financing; meanwhile, 20 percent of the manufacturing sector’s receivables did the same.

While Thomason said any business in any industry will, from time to time, experience some type of cash flow crunch, these types of industries are particularly susceptible.

“The key cause of ongoing cash flow issues for the manufacturing and wholesale trade sectors rests with the inevitable ‘cost/payment lag’ — the time between when the costs associated with manufacturing or procuring a product are incurred and when payment from customers is received,” he explained.

As in the U.K. and U.S., B2B payments in Australia and New Zealand are getting stretched out, the chairman said. He cited Dun & Bradstreet statistics, which found that 10 percent of B2B payments take longer than 60 days and 5 percent take longer than 90 days.

This trend “only makes effective cash flow management more difficult, particularly so given the largest businesses often take the longest to pay,” Thomason said.

With invoices getting settled later, it seems natural that a business would turn to invoice financing, rather than another type of business financing product, to ease the pain. But Thomason pointed to other reasons factoring may be favored among companies in the region.

“Businesses like it because they don’t have to carry the weight of additional debt,” he said. “Unlike a loan, factoring allows businesses to take an advance on money already owed to the business, making it a self-liquidating finance solution.”

He added that businesses also favor factoring because the solution tends to grow as the business does — the greater the value of a company’s receivables (a sure sign of growth), the more capital a business can access through a factoring solution.

DIFA researchers also found that businesses particularly favor the ability to access working capital through factoring within 48 hours and view invoice financing as a way to enter into a position to be able to offer early payment discounts to suppliers.

Thomason said that in Australia, as the alternative lending market grows as a whole, the factoring segment will likely see some new entrants, especially in the emergence of single invoice financing companies. He said that the nation is also poised to see greater use of electronic credit bureau data to mitigate lending risk.

And while the evolution of the alt-lending market signals progress, that progress does not necessarily mean that businesses will no longer struggle with cash flow issues. That, said Thomason, is where invoice financing will always come in.

“Businesses often lament the fact that they are profitable on paper,” he said, “but continue to suffer from poor cash flow positions.”