FINANCE: How To Jack Up Your Cash Flow
Recent Western Cape Business News
WITHOUT a steady cash flow businesses’ survival is jeopardised, more so in today’s recessionary economic climate where cash has become increasingly scarce.
The commercial banks’ attitude currently is not helping, particularly since they have withdrawn from the small to medium size market and with the increasing liquidity problems and rising bad debts, the banks are lending less against the same assets, forcing businesses to reduce their exposure to them in a time when such businesses can ill afford it.
As more and more companies’ traditional sources of finance are drying up, they are forced to look to alternative forms of finance and this is where we believe the factoring route will assist businesses to sustain themselves during these difficult times and afford them ongoing cash flow and working capital to grow their business in more bullish times. Perhaps the most important element of factoring compared to other traditional forms of finance is that it essentially looks past the balance sheet to one’s debtors book and this makes it an extremely attractive option when one’s balance sheet is perhaps not healthy enough to sustain a bank loan.
Factoring has been around for hundreds of years but has not yet been widely adopted in South Africa. It is the process whereby companies are forwarded cash against their debtors book. Their debtors book is in fact sold to the factoring house or factor, which administers it on behalf of the business.
Factoring is a very popular form of finance overseas - if not as popular as overdrafts. World factoring volumes currently exceed $1 trillion. In South Africa factored turnovers are in the region of R25 billion per annum.
Merchant Factors, was founded in 1988. Their head office is in Cape Town and they have regional offices in Durban and Johannesburg. Their core business is predominantly domestic and export factoring. They assist small and medium-sized enterprises (SMEs) with cash flow finance. Says Merchant Factors managing director, Johnny Philippou, “Most SMEs will go through a growth potential stage, but unfortunately their cash flow does not keep in line with this. They find themselves in a situation where they need finance, and this is where we come in.”
The major banks assess businesses based on their balance sheets. “A factoring house will on the other hand place the emphasis on the client’s debtors book” says Philippou. “Conventional banking facilities such as overdrafts do not grow with the turnover of the business, whereas with factoring there is a direct ratio between the turnover of the business and the availability of funds - 75% of turnover always being available.”
The advantage we have over banks is our quick turnaround time, our flat management structure, and our skills and knowledge as evidenced by our staff and management team. “Contrary to the common perception, businesses don’t use factoring only when they are in trouble” says Philippou, “but rather when they go through unexpected growth, or when traditional financing vehicles cannot assist them.
And why go out of business when you can take this factor into account?
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