Debt finance on the rise as firms struggle to secure funds

Businesses are turning to debtor finance to fund growth as other sources of money dry up, according to new figures.

A report from the Institute of Factors and Discounters shows total factoring and discounting turnover for the June quarter was $14.1 billion, an increase of 5.3% on the March quarter.

The figures from IFD also show that nearly 5,400 Australian businesses are using debtor finance facilities.

The growth in the sector comes as businesses, particularly start-ups, struggle to convince banks and other investors to lend money.

Debtor finance allows firms to get funds with the business assets used as security rather than property. IFD says that confidential invoice discounting, where a finance company ‘buys’ a business’ debt and provides immediate funding of around 80% of the amount owed, is still the most common form of debtor finance.

Wholesale traders were the biggest user of debtor finance in the June quarter, making up 33% of the market, followed by manufacturers and property and business services. The finance method was most popular among NSW/ACT firms, followed by those in Victoria and Queensland.

Rob Lamers, CEO of Oxford Funding, a specialist debtor finance provider, says that many small firms are using debt finance as part of a strategy to grow their businesses, rather than just to manage cashflow.

“Despite being on the back of a recovering economy, businesses are still taking on average over 50 days to pay their debtors, which is indicative of the cashflow constraints that many businesses continue to face,” he says.

“This form of finance appeals to SMEs because security is held over business assets rather than real estate. The growth of our industry is inevitable as more businesses become increasingly aware of the benefits of debtor finance.”