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Traders cashing up by factoring

Figures from the Institute of Factors and Discounters would seem to suggest so.

In the past year, the factoring and invoice discounting market has grown 36 per cent. Figures for the 2000 December quarter were up 42 per cent on December 1999. The industry has been enjoying growth for the past few years.

And factoring growth is expected to rise again as small businesses struggle to meet their February GST requirements. February is historically the worst cash flow month for businesses.

According to the latest Dun & Bradstreet survey, 44 per cent of executives surveyed in February said their available cash flow had decreased as a result of making quarterly payments under the new tax system.

Factors buy a business’ debt ledger and take responsibility for collecting those debts.

Some of the factoring growth has come from small businesses trying to gain access to cash to meet their GST obligations.

In theory, the GST was supposed to provide a cash flow bonanza for small businesses. They got to keep the GST collected for three months and three weeks before having to remit it to the Australian Tax Office.

This works if the business handles a lot of cash sales. The problem comes when the business is waiting for outstanding payments. In many cases small businesses work on a 30-day credit cycle, which can quickly blow out to 60 to 90 days.

Institute of Chartered Accountants in Australia spokesman Roger Sullivan said the growth of factoring was a sign small businesses were hunting for money.

“People usually only turn to factoring when they can’t get more money from the banks,” Mr Sullivan said.

“Factoring can be a very expensive option for businesses.”

Others say it is a sign small businesses are becoming smarter in the way they handle their debt books.

Receivables Management regional manager Keith John said some businesses were starting to handle their debt better.

“They’re getting access to their cash quicker,” Mr John said.

“Many small businesses seemed to think they need to offer bigger clients a lag to keep their business but now they’re realising they need to shorten those cycles.

“I think we’ll see a bigger reliance on factoring in future years.”

Benchmark Debtor Finance managing director Peter Langham said two factors had governed the growth of factoring in Australia. One was the GST and the second was growing acceptance of the product.

“Banks are really pushing it which gives factoring credibility. Their coming in forced a lot of cowboys out of the market and pushed the rates down,” Mr Langham said.

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