Working Capital Finance - For Small To Medium Size Businesses
"Cash is King!" We've all heard that many times, especially during the global recession. No one really knows who coined the phrase initially although the most popular theory is that it was the CEO of Volvo back in 1987 after a global stock market crash. Perhaps its origin is less important than its literal meaning - having millions tied up in accounts receivable but no cash to pay creditors and staff is a sure-fire way to destruction.
Unfortunately for South African businesses, the commercial banking sector has become increasingly risk averse and who could blame them? Bad debts and increasing liquidity problems have invariably led to a tightening of the lending reigns. Even small to medium sized enterprises (SME's) with solid balance sheets are finding that the banks are lending less against the same assets. Those who've been fortunate enough to secure finance have discovered that the terms are often prohibitively punitive.
SME's could be forgiven for thinking that the financial services sector has left them out in the cold at a time when they need assistance the most.
Factoring as an alternative means of improving cash flow is becoming more popular with SME's. In fact each year it is estimated that over R25 billion of turnover is factored by South African businesses. Factoring is a form of specialist finance aimed at supporting those that operate in the business to business environment. Funding is secured off the strength of the debtor's book. It's really a means of unlocking the cash that would ordinarily be tied up for 60 to 90 days as accounts receivable. In simple terms the debtor's book is basically sold to a financial institution such as Merchant Factors, who advance funding to the business and then administer and collect the outstanding amounts directly from the debtors as they become due.
The benefits of factoring vary depending where the entity is in its business cycle. An organisation that is experiencing high growth may find themselves constantly walking a financial tightrope between meeting customers' needs and ordering greater volumes of stock from suppliers. Contrarily, a business that is experiencing a slow-down may need funding to keep the ship on course until things pick up again. Factoring provides a working capital solution in both cases.
Businesses that enter into factoring arrangements are generally surprised at how much easier it is to obtain funding as opposed to the seemingly never ending sequence of hoop-jumping imposed with traditional loans and overdrafts. A specialist in factoring is skilled in looking past the balance sheet and making an assessment based on the value locked up in the debtor's book.
Merchant Factors, was founded in 1988. Their head office is in Cape Town and they have regional offices in Durban and Johannesburg. Their core business is predominantly domestic and export factoring. They assist small and medium-sized enterprises (SMEs) with cash flow finance. Says Merchant Factors managing director, Johnny Philippou, "Most SMEs will go through a growth potential stage, but unfortunately their cash flow does not keep in line with this. They find themselves in a situation where they need finance, and this is where we come in."
The major banks assess businesses based on their balance sheets. "A factoring house will on the other hand place the emphasis on the client's debtor's book" says Philippou. "Conventional banking facilities such as overdrafts do not grow with the turnover of the business, whereas with factoring there is a direct ratio between the turnover of the business and the availability of funds - 75% of turnover always being available."
"Some of the key advantages we have over commercial banks are our quick turnaround time, our flat management structure, and our skills and knowledge as evidenced by the length of service of our staff and management team."
"Contrary to the common perception, businesses don't use factoring only when they are in trouble" says Philippou, "but rather when they go through unexpected growth, or when traditional financing vehicles cannot assist them."
Isn't it time to take a look beyond the numbers with Merchant Factors?