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Invoice discounting can improve cashflow

Appeared in NBR - 26 May 2006:

Some small businesses, strapped for capital, would not survive without it
Venkat Raman


Companies strapped for cash should consider invoice discounting as a viable option for short-term relief, an international expert says.
"It is not factoring where entrepreneurs sign contracts for a specific period of time and incur substantial costs as interest or commission. This is a solution to free up cash without any complicated systems or procedures," California-based Interface Financial Group president and chief executive David Banfield said.

The group operates through franchisees and opened its first office here in August 2004. Since then the number of franchisees has grown to five, three in Auckland and one each in Christchurch and New Plymouth.

Mr Banfield was in New Zealand to review the progress of his group, which has 150 franchise offices in the US, Canada, Australia and Canada. He would not reveal the financial details of his company but said New Zealand accounted for 15% of the group's global business.

"There is immense potential for franchisees to set up profitable operations, assisting small and medium enterprises in need of working capital," he said. "Franchisees work with a limited number of companies. Every invoice is thoroughly investigated before discounting, to minimise risks," he said.

Mr Banfield said small companies often faced cash-flow problems, especially during their initial years of operation.

"There are no limits for financing so long as our clients are sound, there is no evidence of mismanagement and the supplier is creditworthy. We provide cash up to 90% of the invoice amount in about five days after due diligence and the balance of about 6% after the invoice is paid. Franchisees retain about 4% as their income."

New Zealand master franchisee Chris Reid said his clients were typically those turned away by financial institutions. Sometimes, factoring companies may refer small enterprises.

He cited the case of a Hamilton-based earth mining company, which was in need of short-term working capital.

"We were satisfied with the company's financial position and provided cash advance of about $80,000 for four months," he said.

Mr Reid said unless such entrepreneurs were offered timely assistance, they would go out of business.

"It is not that we give money away for the asking. We follow stringent procedures to ensure that we would recover the value of the invoice. Since we do not purchase all invoices, there is no problem of recovery," he said.

Mr Banfield said there had been a few cases of default in North America.

"But clients know that they have the ultimate responsibility for the invoices discounted and would be liable to repay if they are not honoured by their debtors," he said.

Mr Reid said his company should not be construed as debt collectors or lenders of the last resort but as providers of finance for a brief period.

"Most of them are typically new, do not fall into the criteria for bank finance, employ seven staff and have a less than $1 million turnover."

He said since clients were not locked into a typical factoring agreement, they had the choice of selecting invoices for discounting and deciding not to continue with the arrangement for a period of time.

"The average amount of funding requested on an initial transaction is approximately $30,000 and on average, they use our service for 18 months," Mr Reid said.

Mr Banfield said no company should use factoring as a permanent cashflow solution.

"Any organisation which uses the invoice discounting facility should be able to manage its finances better and maintain sufficient equity within 18 months, after which it would become attractive to banks."

Mr Reid said his company would deal with any type of business, including construction, advertising and marketing and publishing firms, usually avoided by factoring companies.

"Every type of business has its risk factor, which is why a closely-monitored, person-to-person service becomes important," he said.

A lawyer by profession, Mr Reid has held senior positions in the transport industry, before developing a franchise retail store.