In an interview with SmartCompany, CPA Australia’s small business policy adviser Gavan Ord warned small business owners to lower their expectations for next week’s Federal Budget. Mr Ord foreshadowed that there would be not be “anything really positive” for small businesses primarily because the Government is hamstrung by its myopic focus – what Mr Ord calls the “surplus fetish” – on returning the budget to surplus and as a result, the initiatives for small business were limited.
At IFG, we believe that small businesses should get more from the Federal Budget but are realistic to know that not only will this be unlikely, but that there are more pressing issues for small business. Whilst tax cuts and incentives are great, there are too many solid SME’s that are struggling to make payroll and pay suppliers due to cash flow concerns. When big companies pay slowly (or if that is just their normal terms of trade), then small businesses suffer.
This is why invoice discounting and factoring are on the rise. SME invoice factoring allows small businesses to obtain a credit line based on the value of their receivables. Tight credit conditions are leading to greater instances of invoice factoring for small business in today’s challenging economy.
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In an article on the Smartcompany website, it was reported that 550 Australian businesses have listed on the Frankfurt Exchange taking advantage of the German stock exchange’s lower cost and the speed in which a listing could be achived. Certainly the ASX should be reviewing how it may be able to compete to keep Australian companies seeking public market capital from migrating to Europe.
However, SME’s who are inclined to raise equity capital to assist with working capital may also want to compare the benefits verus invoice discounting. With this form of debtor finance, SME’s can use their invoices as a source of collateral to raise a line of credit through one of Australia’s factoring companies.
With payment days extending out further, SME’s should be researching all available options to ensure they have adequate cash flow to ride through challenging times.
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Another industry source in the mortgage broking sector has emphasised the importance of cross-selling products. In an interview with The Adviser, CEO of National Mortgage Company – Angelo Malizis – said brokers who choose not to diversify, will risk having their clients defect to banks or other brokers. In addition, The Adviser reported that over 20 per cent of brokers do not cross-sell at all and another 17 per cent only cross-sell one product.
While mortgage insurace and life insurance are popular cross-sell products, one product that has the most potential for brokers is debt factoring. Debtor finance is sold to small businesses who require working capital to grow their businesses when cash flow is tight. This often suits SME’s in sectors where the standard terms of payment for invoices exceeds 30 days or is going through exceptional periods of growth.
Factoring companies pay trailing commissions to brokers who introduce clients to their service. In addition to additional fees from the existing client base, brokers can deepen relationships and prevent clients from moving to other broker firms.
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The Productivity Commission has been conducting public hearings into the activities of the Export Finance and Insurance Corporation (EFIC), a Government sponsored entity mandated with helping Australian companies tap into export markets. EFIC’s mission is “overcoming financial barriers for exporters” but opponents believe that they have focussed too much of their resources on helping big corporates and at the expense of the smaller businesses.
Once again, we see how institutions are prepared to back big business and leave the small guys behind. Why is this? A lot has to do with ego in my opinion – it is a lot sexier for the deal guys at EFIC to trumpet a $500 million deal for Exxon Mobil’s activities in PNG than to focus on helping Shiela’s Shoe Emporium (or whatever small business) finance a few hundred thousand dollars of export finance.
Unfortunately, government has failed SME’s when it comes to trying to find finance solutions for working capital and trade finance. For this reason, SME’s are using invoice factoring and invoice discounting as a solution. By factoring receivables, they can use invoices for delivered goods as collateral for a line of credit that can allow them to invest in the stock, staff and materials to keep fulfilling more orders.
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Today, Leighton Holdings reduced its full-year profit guidance to the market by $400-450 million following further problems in the the company’s Airport Link and Victorian desalination projects. Not surprisingly, the company’s share price took a beating, falling 6% in mid day trading as shareholders dropped the stock after yet antother run of trouble. This follows on the heals of the company’s fine for insufficient disclosure to the market.
The challenges to Leighton unfortunately over-shadow the problems that these delayed projects have for the sub-contractors who are doing the work for the likes of Leighton. When projects get delayed, this can cause cash flow issues for sub-contractors, many of whom are small and medium sized businesses without huge cash reserves.
This is why sub-contractors are increasingly turning to progress claim factoring or invoice discounting to solve cash flow issues. By factoring receivables, they can raise much needed working capital to keep paying suppliers, staff and tax obligations.
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Posted in Accounts Receivable Factoring, Construction Factoring, Factoring, Factoring Companies, Invoice Discounting, Invoice Factoring, Small Business Factoring
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Tagged cash flow challenges, cash flow issues, cash reserves, desalination projects, factoring receivables, leighton holdings, leighton results underline cash flow challenges for subcontractors, medium sized businesses, share price, working capital
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According to the latest house price data, the number of properties with mortgages higher than than the property’s estimated value increased last year as house prices declined. Research firm RP Data reported that over 6 per cent of homes were valued at less than their purchase price quarter ended 31 December 2011, an increase of nearly 5 per cent in the September quarter.
This is bad news for the legion of small business owners who were planning to use their properties as the source of collateral for a loan to raise proceeds to be used in their business. Quite simply, if there is no equity in the property, then there will be no proceeds available to be used.
This is why invoice discounting is on the increase for raising working capital in a business. Factoring involves selling accounts receivable to a finance company who provides an advance which injects cash flow into the business. By factoring invoices, small businesses can raise much needed working capital without having to mix business with personal (property).
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Venture capital is back in a big way! As the pending Facebook listing gathers momentum, much focus has been placed on the venture capital backers and the huge fortunes that will be realised when the company’s shares become liquid currency on an exchange. The success of other recent tech listings has also spurred significant investment in the technology sector looking for the next Facebook, LinkedIn or Zynga.
What often goes unnoticed, however, is that most small businesses will be funded by friends and family. Let’s face it – 99.9% of most small businesses do not have the “conquer the world” potential of a software / internet idea, but they also do not come with the huge capital needs and risks that go with it. What are these other 99.9% meant to do when the funds from friends and family runs out?
Well, many are turning to invoice factoring once they reach the point of successfully landing customers. Invoices are assets that can be used as collateral for a source of credit – probably not from the banks, but definitely falling into the sweet spot of the factoring and invoice discounting finance companies in the market. When working capital is required for boring, moderate growth small businesses with high quality customers, invoice factoring fits the bill.
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Now that Bob Carr has been appointed Foreign Minister, Julia Gillard has given Brendan O’Connor the portfolio responsibility for small business. The big question now is will he make any difference given that small businesses have largely been ignored with the crowding out by better funded big business interests. Small businesses are very fearful of the carbon tax and the impact it could have on their enterprises, but there is no chance of this being repealed under Labor. What Mr O’Connor does will be interesting to watch, but the fact is that most small businesses will just assume that his appointment will have very little impact given what we have been conditioned to in the past.
In the meantime, SME’s are focussed on keeping their businesses alive. As if the high dollar and the softening business conditions aren’t enough, the ATO is also bearing down on business owners who are late on tax payments. The ATO went soft in the leadup to the election, but has subsequently taken the attitude of trying to get back on top of these exposures…unfortunately, some very good businesses will get caught in their net and be unable to continue given cash flow issues.
Some small businesses are taking proactive steps to free up cash flow from their invoices – by factoring receivables, cash is generated from unpaid invoices. A factoring company will purchase the receivables and then charge a fee based on the time it takes to get paid for them. This is also known as invoice discounting in the industry.
In our view, small business owners should get themsleves a factoring facility instead of waiting for the Government to solve any problems that are leading to cash flow challenges.
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It’s THAT time again…yes, quarterly Business Activity Statements were due yesterday to the ATO. Along with it – of course – are the payments for GST and PAYG. And while many small businesses had previously used the ATO as a “bank” as they extended their payments out, this is no longer the case as the ATO has taken a harder line.
Paying tax obligations is a major reason why many SME’s are turning to invoice factoring. By factoring receivables, SME’s free up cash flow from invoices that are slow to get paid. Sales may be great but if the cash cannot be used because they are trapped on the receivables ledger, then it is of little benefit to a small business. Factoring and invoice discounting are becoming increasingly popular tools as credit from the banks becomes more difficult to obtain.
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In the aftermath of the bloody Labor squabble, the second victim (after Kevin Rudd of course) was Small Business Minister Mark Arbib. Arbirb abruptyly resigned under the guise of helping the party to heal itself. For small businesses, it is always a setback when a minister in charge of the portfolio resigns but most small businesses would agree that they have gotten very little from Government so it’s all a bit academic.
Government continually ignores the importance of small business choosing rather to focus on the big corporate end of town and mortgage holders. Small businesses just choose to get on with the job…well, they really have no other choice because all they can do is focus on what they can control – and politics is simply not one of those things.
Another area that is outside of small business’ control is trading terms with big companies. I spoke to another small business owner today who complained about the big resources company that only pays them in 60-90 days. That is a long time to wait for some cash…particularly when you do not have a large balance sheet.
This is why many small businesses are factoring receivables so that cash flow can be freed up. By using invoice discounting and factoring, small businesses are regaining control of their financial future and smoothing out the troughs in their cash flow.
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