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The Banking Association Debtor Financing Committee: Transparency key to sound business support for SMEs

03 December 2008 Banking Association Debtor Financing Committee

The current worldwide economic downturn has made conducting business difficult for all industries. Small-to-medium-sized-enterprises (SMEs) sometimes, due in large part to cash flow pressures, find themselves tempted to make hasty decisions in an effort to counter associated ill-effects and thereby inadvertently expose themselves to even greater business risks.

SMEs face a myriad of start-up difficulties when attempting to establish their business, the most significant being access to working capital. With larger financial institutions generally not viewing SME transaction values (which range from R20 000 to R3m) as a good return on investment, many smaller business owners find themselves making unsound business decisions in an effort to access some form of income. These may include, for instance, entering in dubious supplier agreements, overstocking in an effort to obtain discounts or financial mismanagement stemming from a lack of expertise or efforts to ‘‘move money around’ in order to maintain operations.

The debtor finance and factoring industry has enjoyed tremendous growth as a direct result of this financing gap and, as SME market specialists, are able to offer a wide range of value-added services and benefits, including, amongst others, advice on financial decision making, product pricing and general business management. Smaller business owners do not have to ‘learn as they go’ as practical guidance is available.

“Factoring and debtor finance institutions offer start-up undertakings far more than access to finance,” says Ryan Botha, CEO of Banking Association Debtor Finance Committee member company, the Regent Group. “We have witnessed businesses fold and flourish and are therefore well placed to provide relevant input on what works and what doesn’t.”

Although invoice trading is at a maximum at this time of the year and generally indicative of a well performing industry, financing houses, especially under current economic conditions, need to remain aware of market instabilities and manage growth responsibly. With many undertakings being stretched financially due to the market downswing, acquiring capital necessary to sustainability has become an even greater imperative and resulted in risky business practice in some instances

Obtaining, and granting, access to funding, however, requires transparency in order to facilitate optimal support. Ill-advised business decisions made under financial duress need to be openly disclosed to financiers as this will afford loan originators the opportunity to offer remediation assistance aimed at sustaining sound business operations and thereby mitigating the risk of further ill-advised decision making.

Securing contracts, even larger ones, does not necessarily guarantee a more predictable cash flow situation for SMEs, posing yet another business development and operational challenge. Larger organisations are often, paradoxically, the most guilty of inordinately extending payout periods, making it extremely difficult for smaller companies to finance their day-to-day processes. Private and public enterprises entering into SME service agreements need, therefore, to remain cognisant of the fact that businesses having access to capital is essential to economic growth and assist, rather than hinder, their success.

There is, at present, a real need for the market to manage their operations responsibly and remain mindful of each participant’s right to function as a successful commercial entity. “Conducting one’s business with openness, integrity and consideration will go a long way towards ensuring that South Africa’s economy continues along its relatively stable path and that businesses have the best possible chance of remaining viable in the current economy,” concludes Botha. “Factoring houses, to this end, have a far greater capacity than traditional lending institutions to assist with managing client cashflow and guide them through periods of financial difficulty.”

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