Alternative financing a sign of the times

The growing use of factoring by New Zealand businesses is a reflection of the tougher economic times and the desperation some companies are feeling, according to Peter Sherwin, a partner at chartered accountants and business advisers Grant Thornton.

The latest Grant Thornton International Business Report, which canvasses the opinions of medium to large privately held businesses, shows that 16% more New Zealand businesses are using factoring than last year (versus Australia 4% more).

Factoring is an alternative means of external funding. A business sells its accounts receivable to a third party at a discount in exchange for an immediate cash injection with which to finance continued business. It’s a strategy used to get cash quickly, although there is a price to pay - some of the value of the invoice is lost.

“The data suggests there is a perception that businesses expect less support from traditional banks this year and so they have begun looking more closely at alternative funding. Last year 90% of those surveyed felt confident about bank support but that figure has slumped to 74% for 2010. This is the second biggest decline among the 36 countries surveyed,” Sherwin said.

Given that scenario, Sherwin said it was not surprising that there had been a significant uptake of factoring. Its increasing use is reflected in the perceived accessibility to finance. In 2009, 74% of businesses said that finances were expected finance to be less accessible – this year only 21% hold that view.

Sherwin said that factoring was introduced into New Zealand by Scottish Pacific Business Finance about 15 years ago but had been a relatively low-profile trade financing facility in the past.

“The growth in useage in recent times indicates the shortage of long term finance and a shortage of working capital. An increase in factoring really demonstrates an element of desperation among some businesses, which are finding it harder to borrow from banks. It’s not unusual in a recession to see a growth in non-prime lending sources but it is a concern as funding such as factoring is more expensive that a bank facility.

“You can get yourself into a tough situation. Once you start using factoring it is hard to get out.”

The International Business Survey covers more than 7400 respondents in 36 economies. A privately held business includes businesses such as entrepreneurs, family businesses and non-listed entities, which account for over 98% of businesses worldwide.

For further information, contact:

Peter Sherwin
Partner, Business Advisory
D +64 (0)4 495 3777
M +64 (0)21 638 522
E peter.sherwin@nz.gt.com