Factoring and discounting, also known as receivables finance, has seen a 21 per cent increase in the year to March 2007, and will have turnover in excess of $50 billion this year for the first time according to John Bills, secretary at the Institute for Factors and Discounters Australia and New Zealand Inc (IFD).
The strong growth is attracting new entrants into the market, with IFD members including the big four banks, St George and Bank of Queensland, and private specialty lenders.
Receivables finance involves selling an invoice as an asset, with Bills defining the product as, “A way for a company to fund their business without increasing borrowings, and a way for their growth to become self financing.”
Historically in Australia, personal assets such as bricks and mortar have been used to secure lending, and there is a macro trend towards using other business assets such as the trade ledger.
Lenders will provide an initial advance of around 80 per cent, with the outstanding paid when the creditor pays in full. Liberty Financial are extending potential funding lines up to 95 per cent, targeting businesses with annual revenues between $1 million to $200 million.
Receivables finance example
Bills said normally if you need to fund your business, you need to visit a bank or financial institution and borrow funds.
“If you have a balance sheet of $100,000, and need to borrow $50,000, then you balance sheet increases to $150,000.
“By selling off part of the $80,000 in outstanding invoices, your balance sheet remains at $100,000. It’s a way of funding your business without increasing your borrowing, so the product is unique in that regard.
“This means turning a problem, which is unpaid invoices, into cash.”
Specialty finance lender Liberty Financial enters the market
Liberty Financial released their receivables finance product in May this year, and according to Winston Nesfield, general manager business finance, there has been a high demand for lenders who are willing to lend against non property assets to provide working capital to the small and mid tier markets.
“We are quite encouraged, the early response has been positive from customers and brokers”.
Nesfield identifies the positives of receivables finance. “We can act very quickly and very nimbly across several different borrowing areas that almost every mid sized company is looking at, and doing it in a way even some of the majors can’t deliver in those times.
“And if we accept the deal then we would dispatch an audit team to look at the particular company, their financials, their invoice and delivery systems, and then work our way from a conditional to an unconditional offer.
“We have the application approval process fine tuned to a couple of days, depending on the availability of the company for the audit. We can meet a client, conduct our audit and approve funding before the end of the week.”
Liberty offer invoice discounting finance, where the borrower maintains the responsibility for collecting from creditors. With factoring, the financier will assume the collection responsibilities.
Bills adds that factoring is usually for smaller businesses, “and in addition to getting the cash, you can also get the factor to look after the debtor accounting. It’s a way of outsourcing your accounts receivable, for which you will be charged a fee.”
Risks & Rates
No lending is without risk, with Nesfield identifying the problem as twofold. One is the debtor does not pay, and the other is fraud risk where the documents presented for payment are not bona fide.
“To cope with this, we are comfortable that our upfront audit when we take on a ledger is exhaustive, and makes sure the trade debt we take on is all enforceable debt. We will check an appropriate amount of the trade ledger for customers and that they have received delivery of goods.
“On an ongoing basis we spot check, but we do rely on the borrowers systems so we require a level of data provision that gives us the comfort that we know what is going on in their accounting system, with some form of random checks. So if the borrower knows we are checking, this will enforce a certain degree of discipline.”
When auditing the financials of potential clients, Liberty may find some customers that show a high percentage of payment disputes, but potentially this may represent a small part of the trade ledger.
In this scenario, the customer may still be approved but the advance rate would be reduced from the maximum 95 per cent level, to better match the borrower risk grade based on historical debtor payment performance.
Nesfield explains it can be quite challenging to quote receivables or debtor finance rates, because it’s on a case by case basis and determined by risk, with interested companies finding the interest rate, “Very competitive to some of the overdraft lending already on the borrower’s books.
“There are several variables that go in to pricing a receivables deal. What we can say is that we are seeing coming into our doors, are companies who have currently different forms of financing including overdrafts, and when we look at that company’s strength and their trade ledger or debtor’s payment performance, we are in a position to offer them a rate that they find competitive.”
Loans have no fixed term and a variable interest rate, with sizes varying upon applicant risk grading, with the advertised minimum and maximum loan funding size being $250,000 to $25 million.
Total factoring and discounting turnover in the March 2007 quarter was $12 billion, a 21 per cent or $2.2 billion increase on the same quarter last year, with factoring turnover down 1 per cent to $758 million and discounting up 23 per cent to $11.2 billion. (Source: IFD Update, March quarter 2007).
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