SMEs that are able to offer their clients more favourable credit payment terms are gaining a competitive edge within their industry, while those struggling to grow in the current economic environment need to employ financial solutions that are more resourceful.
The 2013 economic forecast for growth in South Africa has been reduced from 2.8% to just 2%, making the outlook for SMEs very competitive.
Cash flow restrictions also inhibit entrepreneurs and SMEs from offering preferential credit terms to their clients, as they would be unable to fund from their own resources. In addition, these SMEs struggle to obtain finance from traditional lenders, as traditional lending facilities, such as overdrafts, require collateral security such as property or other capital assets to access working capital facilities.
Regular credit providers also look at the historical performance of a business and seek strong balance sheets. This affects small and emerging businesses more so, as they have a lack of or a sparse trading history. SMEs are struggling to find a foothold in the market due to limited demand in the current economic environment. They are further constrained by the limited financial recourses available to them, which makes it difficult for them to expand, despite having sound management principles.
Debtor's finance one model
SMEs needing to be more innovative in their financial management practices could consider private lenders who provide debtor's finance facilities by taking factors, such as payment history, credit record of the debtor and the business model into account.
Businesses can obtain short-term working capital via a debtor's finance credit facility, which uses the business debtor's book as security. A debtor's finance facility provides a business with the means to extend competitive credit terms to its customers, without running the risk of facing cash shortages or losing control of their debtors' book.
Debtor's finance involves the purchase of an invoice from a supplier by a financier, who pays a percentage thereof within a few business days, giving the company much quicker access to the liquidity it requires.
Customers will always seek suppliers who can offer them with extended credit terms, as this improves their cash cycle.
Debtor's finance facility will be especially beneficial to growing businesses with good customer relationships and a healthy debtor's book. Credit terms asking for deposits will be less attractive to customers and early settlement arrangements might negatively impact the company's profits. Early settlement discounts can range up to 10%, which is more expensive than the cost of a debtors finance facility.
A financier's average term ranges up to 5.5% for debtors with 60 day terms, so the business will lose more by offering discounts to its clients.
Disclosure of using this facility does not have a negative impact on the company's customers because debtor's finance has become a well-known and valuable tool and shows that one's business is applying innovative cash management resources. It is a flexible solution; as turnover increases so the debtor's facility will grow with it.
