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SMEs turn to factoring as ATO cracks down on late payments
With insolvencies on the rise due to the Australian Taxation Office's toughened approach on debt collection, more businesses are considering the benefits of factoring compared to the traditional forms of cashflow finance.
Managing Director for Bibby Financial Services Australia, Greg Charlwood, said Australia is starting to adopt factoring, renowned in Europe as a mainstream form of cashflow finance.
"Many businesses, regardless of their capital value, struggle to meet running business costs such as tax, rent and staff that require prompt settlement.
"Factoring can help protect businesses from insolvency because it enables up to 90% of invoices to be converted almost instantly to cash, thereby eliminating the 60 - 90 day exposure period.
Factoring is a cashflow solution for SMEs who want or need to gain access to funds locked up in unpaid invoices. It works by converting a businesses unpaid invoices into instant cash which can be drawn upon at a rate as competitive as a bank overdraft. This service is also referred to as discounting.
According to Greg Charlwood, a growing number of SMEs across multiple sectors are turning to factoring to avoid the significant pitfalls of catering to late paying customers.
Figures from the Institute for Factors and Discounters Australia and New Zealand show that factoring and discounting grew to $4.9 billion in the quarter to March 2003, an increase of 34 per cent for the same quarter in 2002.
Charlwood attributes the growth in factoring to the growing awareness among credit professionals and businesses that there are credit alternatives available other than bank loans that have traditionally been recognised as the first port of call for cash.
"It is a big commitment for a small business operator to commit to a business debt secured by their personal assets such as the family home. Many are considering factoring as an alternative option," he said.
Mr Charlwood added that factoring enables SMEs to vary funding arrangements in line with business performance and growth.
