Small business  can benefit from factoring and debtor finance says, Gary Green, national head of sales at Bibby Financial Services

The Australian two-speed economy is reducing business confidence, and small business in particular seems to be feeling the pinch.  In our recent Bibby Barometer Small Business Survey, 83 per cent of small businesses reported experiencing cash flow problems in the past year.

It is no surprise therefore that small businesses are increasingly turning to factoring (also known as debtor finance) to solve their cash flow challenges.

What is factoring?  
Factoring involves the sale of a business’s unpaid invoices to a factoring company, called a factor, in return for immediate cash.  This process can convert up to 80 per cent of the value of each sales invoice into immediate cash within 24 hours. Once payment has been received from the debtor, the remaining 20 per cent, less a service fee, is returned to the client.  The sales accounting functions may also be provided by the factor, which manages the sales ledger and collection of accounts on an ongoing basis.

Factoring is designed to improve business cash flow and support business growth by releasing cash tied up in unpaid invoices. Unlike other funding arrangements, no real estate security is required and so directors don’t need to risk their personal property in the current uncertain economic climate.

Rated as one of the top three products to watch in 2011 by Money Magazine, the use of factoring by Australian businesses is on the rise. Recent figures from the Institute of Factors and Discounters (IFD) for the March 2012 quarter, released on 30 May 2012, confirm the second highest factoring turnover figures on record of $1.26bn for the March 2012 quarter, which represents a 31.4 per cent increase on the corresponding March 2011 quarter.

There is no doubt that the challenging cash flow problems facing small businesses can be reduced by smart decision-making, and we have many clients in the printing industry due to the fact that extended payment terms can be common, and consequently large amounts of a printer’s working capital can be tied up in their receivables.

Interestingly, factoring can be a cost-effective form of financing due to its service component. Many clients report that their accounts receivable costs reduce as debtors respond to a more disciplined collection process. Other benefits include the ability to negotiate supplier discounts and bulk buying discounts. 

Our clients report that one of the biggest benefits of using a factoring service is increased management time to reallocate to new business growth and servicing of current customers.

In this tough business environment, it makes sense to maintain open lines of communication between your business and its customers, ensuring that you continue to improve on customer service standards.

Maintaining a close relationship with your customers can improve retention, as well as minimising any future issues with invoice collection.