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Posted in Greg Charlwood - The Factoring Expert September , 2013  4 Comments  Add your comment ›

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The broking and accounting community are strong referrers of invoice finance business. In fact, they usually contribute around 60% of an Invoice Financiers new business. With this in mind I am pleased to launch Working Capital World, a factoring newsletter for brokers and accountants that will be issued on a quarterly basis.

Introduction

The broking and accounting community are strong referrers of invoice finance business. In fact, they usually contribute around 60% of an Invoice Financiers new business. With this in mind I am pleased to launch Working Capital World, a factoring newsletter for brokers and accountants that will be issued on a quarterly basis.

It seems ages ago that we launched PWCS. In reality, it was only three months ago. It has been a hectic three months reconnecting with all of my contacts in the invoice finance, broking and accounting worlds. It is really great to be back in the game.

I am pleased to report that our offering has been well received with our USPs of prompt approval, flexibility and complete support of clients. Our commitment to genuinely fund to 90% and competitive pricing are also great qualities that we bring to the table.

We now have five clients on our books who are receiving excellent support and service from our back office based in Auckland. As many of you would know our NZ parent has been operating in NZ for five years and is one of NZ’s major non-bank invoice financiers.


Invoice finance industry in Australia

Total debtor financing turnover in the June 2013 quarter was $15.4 billion (an increase of 5.7% on the March quarter). Invoice discounting turnover was $14.0 billion and factoring turnover was $1.4 billion. Total turnover for the 12 months to the end of June 2013 was $62.8 billion.

Looking at monthly growth rates over the past five years years we see some interesting trends that are principally indicative of the exit of Commonwealth and ANZ from the market. As can be seen from the overall invoice finance graph, the overall market has gone backwards. Early in the graph period we are seeing the lingering effects of the financial crises and in the latter part the exit of ANZ and Commonwealth.

The second graph only contains factoring. In other words invoice discounting is excluded. As can be seen factoring is growing from strength to strength. In fact growth in the last five years has averaged 15%.

          

Factoring has continued to go grow because it is supplied to smaller SMEs by non bank independents. It is a fact that without real estate security it is very difficult for a smaller SME to get meaningful cashflow finance from banks. Even real estate supported bank facilities have limited benefit as they do not grow in line with the growth of the business.

The two big questions in our market are whether or not Commonwealth and ANZ will re-enter the market and whether PPSA will have long term effects on the invoice finance market. The questions, are too a great extent, related. My view is as follows:

Under the PPSA, suppliers to a borrower can gain a superior claim over other Security Interests (Purchase Money Security Interest, or PMSI (pronounced “Pimsy”)), including banks, unless the bank takes an assignment of receivables and notifies the PMSI holder of the assignment of debt (pursuant to Section 64 of the PPSA). This means that banks are to an extent losing receivables as collateral and thus reducing their income base. This is one reason I believe banks will re enter the invoice finance market. The other reason is that many borrowers like to have one bank to obtain the various forms of finance that they need. This will mean that such borrowers who also require Invoice Finance may be lost to other banks who can provide all of the borrowers needs, including Invoice Finance. I think ANZ and Commonwealth will bev back within 3 years.

To date the PPSA has only had minimal impact on the factoring Industry. The main issue has been the impact of the 15 days notice required under Section 64. During this 15 day period suppliers who have registered their security interest may claim receivables in priority to the invoice financier. Invoice financiers need to properly assess the risk in funding before the 15 days notice expires. This risk assessment includes a comparison of the amount owed to PMSI holders relative to debtors, ageing of the suppliers account and the nature of the supply.


Benefits of invoice finance and using Pacific Working Capital Solutions

In my opinion, invoice finance can be used in two basic but highly beneficial ways.


Firstly let’s look at growing companies lacking in sufficient capital. These businesses have invested savings, obtained credit from suppliers and probably have an overdraft secured by equity in their property. This cash resource is then invested in stock or a manufacturing process. The goods are then sold on credit and much of the scarce cash resource is tied up in unpaid invoices. The invoices are paid in 45–75 days. During this time the business can’t actively grow as they don’t have the cash to fund new stock. With invoice finance we provide 90% against outstanding invoices. There is usually two months’ worth of outstanding invoices in most B2B businesses. So, a business that has annual sales of $1.2m, they would have approximately $200k in invoices outstanding, we can make $180k available immediately, enabling the business to immediately reinvest in stock rather than doing it over the next 60 days. As that stock is sold we make a further 90% available against those invoices: again, rather than waiting 60 days, the money is available upfront. The effect of this kind of finance is that you can turn your scarce cash resource over perhaps 12 times per year rather than six (365 days divided by 60 days of outstanding invoices).
 

The second common usage is to condition creditors. The scenario is basically the same as that above with the exception that the business has traded at a loss for a period of time and this loss is effectively financed by overdues to suppliers, the ATO or superannuation. This situation usually creates problems with suppliers which dramatically increases pressure on the business’s owners. By receiving the initial inflow of cash against 60 days of sales, overdues are brought up to date and funding against new invoices keeps suppliers and ATO up to date and happy.


So why should SME’s use Pacific Working Capital Solutions for their invoice finance needs? Flexibility, speed, engagement and support are the key reasons. We are flexible and will overfund clients if the need arises. We are quick to approve facilities and in our day to day responses – the need for cashflow is always urgent and we react accordingly. We engage deeply with our clients so that we understand their business and the issues that confront them – it’s much easier to help when you understand the issues. Lastly, we support our clients in tough times. Our product USP’s are as follows:


• prompt approval – days not weeks
• flexible – provide over-advances, stretch concentration rules etc
• access to decision makers
• genuinely offer 90% purchase price
• secure online account access – monitor your account, lodge invoices and request draw downs online
• we look at how to write deals, not whether we should write them.


Our commission structure

There are two stages. Firstly, half of the take on fee is paid as commission.  Take on fee is a percentage of the receivables at take on. This is usually around two months of sales. An average sized client will have $400k in receivables and an average take on fee is 1.25%. So the take on fee should be $5k on average.  We offer brokers half the take on fee.
The second stage is a trail for the life of the deal.  The trail is based on the factoring fee. The factoring fee for an average deal is calculated as follows. $2,400,000 annual sales x 1.25% = $30k in fees. We offer brokers 10% of the $30k in fees per annum.
Well, that’s all for this months edition. I look forward to chatting to you over the next month and hope that you have a great quarter on the new business front.

 

 

 

4 Comments  Add your comment ›

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