Our series on business lending this week turns its attention to cash flow lending, or debtor finance as it is also known. Mark Beyer reports.
DEBTOR finance, cashflow lending, factoring and discounting – these are three different names for what is one of the fastest growing forms of business finance.
The industry has achieved average annual growth of 29 per cent over the past four years, according to the latest data from the Institute for Factors and Discounters.
This took national turn-over to $4.8 billion
in the September 2002 quarter.
Despite this rapid growth, however, debtor finance remains a niche product. The number of companies using the product was just 2,842 in September 2002.
Based on Western Australia’s 7 per cent share of national turnover, this means only about 200 WA businesses use debtor finance.
The low usage reflects several things, including limited promotion of the product by most banks, and lingering perceptions of ‘factoring’ as a ‘lender of last resort’ pro-duct.
The reality is that debtor finance is ideal for many growing businesses, according to Peter Langham, managing director of Benchmark Debtor Finance.
“The product is much more widely accepted in the UK and Europe, which shows there is plenty of scope for more growth in Australia,” he said.
Any doubts about the credibility of debtor finance as a financing option should be dispelled by the fact that National Australia Bank – arguably Australia’s most prudent and successful bank – is the market leader.
“We are the largest player in this market in the country,” said Stuart Wright, the National’s general manager, business financial services WA.
“We see it as a core product. It provides a handy solution for businesses that are growing, or have a seasonal finance requirement.
“It can also help businesses that need working capital for an acquisition.”
Mr Wright said the National was the first of the big banks to enter the market, in the mid 1990s.
Competition for the big banks comes from a small group of specialist debtor finance firms in WA.
These include Benchmark Debtor Finance, Cash Resources, Cashflow Factors, Citizen Factoring, Key Factors, Orix Cashflow Finance and Scottish Pacific Business Finance, now owned by St George Bank.
The key attraction of debtor finance is that companies can turn their invoices into cash. It means that growing businesses automatically have access to extra cash, norm-ally up to between 80 per cent and 90 per cent of the value of their invoices.
There are two main kinds of debtor finance.
Factoring, which accounts for just 15 per cent of industry turnover, involves the sale of invoices to the financier. Typically, debtors are informed that their invoices have been sold.
The more popular option is invoice discounting, where the lender takes a debenture charge over the invoices. This is a confidential or non-disclosed facility.
The newest entrant to the WA market, Orix Cashflow Finance, offers five different debtor finance products.
According to new business manager, Vic Hardy, Orix will provide a range of options beyond what is generally available, including business loans secured against stock, debtors, real estate and quality shares.
Mr Hardy said this would provide a high degree of flexibility, since Orix would be able to structure a loan to suit the assets of each borrower.
Benchmark Debtor Finance, established in Perth in 1998, has grown to be the second biggest player in the WA market, Mr Langham said.
Based on Benchmark’s success in WA, it opened an office in Melbourne last year and plans to be a national player within two years.
Mr Langham said Benchmark was looking to recruit staff to open new offices in Sydney and other States.
To support its growth, Benchmark has raised additional capital from its share-holders and negotiated new wholesale funding lines with GE Commercial.
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