Puzzle Finance Blog


Funding options for small businesses


Many small businesses secure funding using the value of their own homes, but falling property prices means it might make sense to secure alternative funding sources.

Each week auction clearance rates remain subdued and this slowdown in the property market is likely to affect businesses' cash flow if a loan is secured by a property's value, according to Rob Lamers, head of debtor financing at Oxford Funding.

“How big a problem this becomes depends on how much property prices decrease by,” he says. “But when prices drop, financiers adjust their credit lines. Back in the 1990s, property values fell by a third and there were major reductions in financing”.

A property previously valued at $1 million would typically attract 80 per cent funding credit, which means the business could borrow $800,000. A revaluation of that property to $900,000 would mean a business could only borrow $720,000 – a reduction of $80,000.

Lamers says for SMEs, property is the most common form of security provided for financing but this may not be the most appropriate long-term solution, as credit doesn't increase as the business grows. He says a range of financing options is needed.

One option is debtor financing, which his company provides, and involves having credit secured against a business' sales invoices. These invoices are assets of the business and increase as sales increase.

“By leveraging your debtors' ledger for funds, you can reinvest in business growth without being restricted by the property market,” Lamers says. “If you have debts of $500,000 you can get access to $400,000. All you need to provide is an invoice”.

There are two main types of debtor financing: invoice discounting and factoring. Factoring involves a business supplying goods to a customer and then sending a copy of the invoice to a financier to whom the customer pays directly.

As the business raises an invoice, up to 90 per cent of the value is generally released within 24 hours. The remaining 10 per cent is paid to the business, less a service free, once payment is received from its customers.

The other type is invoice discounting where much the same process is applied but customers are unaware of the funding arrangement and generally pay their invoices into a trust.

How much financing you can get through debtor financing depends on the value of your debt – your invoices. Carl Chatterton is the founder and managing director of L&N Group, which imports building materials to supply to hardware stores.

“We've been going nearly two years and while we initially used our own funds, we were growing so fast we had trouble funding our expansion,” he says. “We chose to use debtor financing to fund our growth and have been really happy with it”.

Chatterton says he can access up to 90 per cent of the value of his invoices.

“We get charged an administration fee and pay interest on the invoices which fluctuates depending on how much we have borrowed,” he says. “But we find it a really flexible way to secure funding because the amount you withdraw is up to you”.

He says one of the reasons he chose this method was because of the immediate access to funds. Many of his customers do not follow the 30-day payment terms and the time lag in receiving payments can hurt.

“Also we import our stock and have to pay our suppliers upfront so we need money for that,” he says.

Chatterton uses the services of Oxford Funding and says it offers different packages, including one where it chases the invoices for payment on his behalf. Chatterton says if you are a new company, financiers may prefer you take out this type of package.

“There have been stories where companies are sending through dodgy invoices so having a financier chase the invoices and check whether goods and services have been delivered protects them as well,” he says.

While he couldn't think of any disadvantages to this type of financing, Chatterton says sometimes his customers raise concerns about needing to pay their invoice to another company.

“I just explain what debtor financing is and they're usually fine with it,” he says. “In fact, in a few cases some of my customers have gone out and accessed this type of funding themselves”.

Posted by Gayle Bryant - The Age on 5th July, 2011 | Comments | Trackbacks
Tags:

Bookmark and Share

The trackback URL for this page is http://www.puzzlefinance.com.au/trackback?post=24411201


Trackbacks

There are no trackbacks for this post


Comments

There are no comments for this post


Post a Comment

HTML is not allowed in comments, http://... will be automatically linked.


Name (required):


Email Address (not displayed):


Comment (required):


To help prevent spam, please enter the word heal here:

Puzzle Finance Blog

About Puzzle Finance


Archives

September 2017
August 2017
July 2017
June 2017
May 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010

Tags

Purchase or Rent (1)
The Age (1)

Recent Puzzle Finance Blog Posts

8 Sep 17: Why property investors aren’t necessarily as rich as you think they are Investors have surged in the Sydney and Melbourne property markets at  record levels  over the past few years, with many amassing significant prope... [More...]
5 Sep 17: ‘Risks magnified’ when investors use equity loans to buy multiple properties A common strategy used by property investors around Australia to amass large portfolios of real estate is potentially very risky, experts warn. More th... [More...]
30 Aug 17: Investors can own multiple properties but still be eligible for first-home buyer benefits A little-known loophole across all states and territories is allowing investors, who already own multiple properties, to take advantage of governmen... [More...]
29 Aug 17: A homeowner's guide to letting on Airbnb More and more homeowners are looking for ways to increase their household income. This includes looking to their family home to provide extra funds through Ai... [More...]
27 Aug 17: Organise finance early this spring property season  With more properties soon to hit the market, lenders will be stretched and house hunters should organise finance well ahead of time, prop... [More...]
26 Aug 17: The obvious mistakes first home buyers make JUST say you won the Lotto or a kindly relative left you a sizeable inheritance and, hooray, you have a deposit for a bedsit in a far-flung corner of Sydney.... [More...]