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Selling invoices helps small firms deal with cash crunch

Appeared in NBR - March 30th, 2007:

When a freight forwarding company in Wellington won a new contract to move building equipment and material to Auckland, the owner faced a dilemma. He needed $460,000 to buy an extra truck and to hire more staff.

He was turned away by two commercial banks but the third one
advised him to approach Interface Financial Group (IFG). In less than a week, he had the money in his bank account. Six months later, he laughed his way to the bank, to experience a difference in treatment. The banker discussed his business plan and advanced him a loan to expand his business.

Today, his company's turnover is more than $2 million a year and employs 35 people.

A North Shore, Auckland-based IT recruitment firm, which could not get additional credit from its bank to service a new contract, approached Interface and received $360,000.

Commercial banks could be allergic to lending to new companies and generally restrict their exposure to organisations or individuals who can either provide their homes or properties as collateral, Interface's California-based president David Banfield said.

Small and medium enterprises needed short term working capital, from which banks generally shied away because of insufficient assets.

'Small enterprises are growing rapidly in New Zealand and new ones experience growing pains and need fast finance to carry on their operations.

'We buy select invoices from clients at a discount and provide them with immediate cash. Funds are made available with the flexibility for clients to use them as and when
needed,' he said.

Mr Banfield was in Auckland last week to celebrate what he called, 'the phenomenal success' of his company's operations in New Zealand. 'The fact that we registered 13% growth in 2006 shows there is immense potential in this country. We are two years ahead of our plan for New Zealand,' he said.

Local director Chris Reid said small enterprises were prone to cashflow problems from time to time. 'They need money to either expand business or purchase materials. So long as they are not seeking funds to tide over financial malfunction, we would help,' he said.

Westpac customer segment manager for Small Business Campbell
Wright did not agree that banks were unsympathetic to small enterprises. He said that since Westpac and Trust Bank merged in 1996, small businesses were being offered an
extensive range of services.

'Our services are flexible and we work with clients to suit their requirements. Our branch managers work with owners of small enterprises and recommend the product suitable to them,' Mr Wright said.

Westpac also provides a business start-up guide to small and medium enterprises. The package includes information on business planning, marketing, tax, finance, legislation
and the steps and procedures for raising funds.

Mr Wright defined a small enterprise as 'an organisation with less than $5 million annual turnover. 'Apart from offering assistance to start businesses, we constantly review their operations, progress, profitability and other issues that would help them grow. Professional investment
advice is also offered with a range of options,' he said.

Mr Banfield described IFG as 'an organisation that markets services to banks. Most banks that are not able to lend money to clients refer them to Interface. We are able to undertake funding as our approach is not based on a lending formula.

'Ours is a buy-sell transaction. In less than two years, our clients are able to stabilise their operations and qualify for bank credit,' he said.

A number of global consultants also offer tailor-made services to small and medium enterprises in New Zealand. Deloitte partner Matt McKendry said New Zealand entrepreneurs had to understand and utilise existing and emerging opportunities in international markets. He said the government offered three types of programmes to facilitate
the growth of SMEs.

'The Better by Design programme enables SMEs to equip for
the global marketplace and generate price premiums, while the Beachhead programme helps them access networks and resources that would usually be out of their reach.

'The Escalator programme brings expert advice and assistance
to raise capital for growth,' Mr McKendry said.

But Mark Redpath, director of Holes Solutions, a Bay of Plenty based research and development company, said companies aiming high needed more than a few thousand dollars.

For the past three years, he and his business partner Colin Nicholson have been developing a new pipeline maintenance technology. They have established Pipeclenz to take their technology to lucrative export markets.

He said he was grateful for government grants totalling $25,000 but that was not enough. 'We would like to see the government use its existing schemes to underwrite a loan scheme for business, allowing them to borrow from traditional lending institutions at the levels required to really build a business.

'The vetting and monitoring systems are already in place via Tech-NZ, New Zealand Trade & Enterprise (NZTE) and other agencies. It just needs some action,' he said.

Mr Redpath has put up a proposal for a plan to fund small enterprise development above $25,0000. He said there would be significant returns and it would reduce costs to taxpayers.

'This could happen in Export Year 2007, but we need to get beyond the bureaucrats to key government decision makers,' he said. Mr McKendry agreed, saying there was a need for government-backed programmes that would enable quality and professional advice and assistance for SMEs to improve
their capability.

'Today's global economy requires firms to be adaptive and responsive to change, and while traditional government policy and incentives are helpful, creating businesses that
are internally competent, strategically robust and globally connected is more likely to produce an improved long-term outcome for the business,' he said.

Small Business Minister Lianne Dalziel said the staff size in most small and medium businesses was not conducive to high levels of growth. 'Ninety-six per cent of New Zealand
businesses employ fewer than 20 staff and a majority of those have fewer than five staff.

She said she was not of the view that the number of staff employed should be the sole measurement of SME status. 'However, it shows that the scale and scope is not there to meet many of the challenges of business.'

Written by Venkat Raman