Debtor finance rises 6.1% as SMEs battle cashflow struggles

Small businesses appear to be turning to debtor finance to deal with their cashflow woes, with a 6.1% rise in the value of the sector in the June quarter.

A total of $15.2 billion in total receivables finance, also known as debtor finance, was accessed in the three months to June, compared to $14.3 billion in the March quarter.

The figures, released by the Institute of Factors and Discounters, show a 7.3% increase in June compared with the same quarter last year. Total debtor finance provided to Australian businesses in the 2010/2011 financial year stood at $60.6 billion.

Debtor finance was most popular with the wholesale trade in the June quarter, accounting for 36% of total receivables. Manufacturing was second on 22%.

Geographically, businesses in NSW and the ACT accounted for 36% of new debtor finance, at $5.4 billion, with Victorian firms responsible for 26%, or $4 billion. Queensland had a 21% share, with WA accounting for 10%.

The figures suggest that debtor finance, where a business is funded based on the value of the outstanding invoices it has issued, is being accessed by SMEs that are struggling with late payment and sluggish consumer sentiment.

A report by Dun & Bradstreet on the June quarter found that Australian businesses are taking an average of 53.4 days to pay their bills. The problem of late payment has had a knock-on effect for many start-ups.

Rob Lamers, head of debtor finance at Oxford Funding, says the sector is growing due to economic conditions.

“With ongoing economic instability, more businesses are searching for forms of finance that can keep their cashflow under control,” he says.

“Debtor finance allows them to do that, with the added appeal of using business assets, rather than real estate, as security.”

“Many Australian businesses cannot afford to wait 53 days to be paid, especially smaller businesses which have fewer resources and cash reserves,” says Lamers.

“As a result, we expect the use of debtor finance to be a growing trend in Australia as more businesses become aware of its effectiveness in improving their cashflow.”