Capital liquidity is the lifeblood of small and medium enterprises (SMEs) and has long been a prime concern. For some, difficulty in being able to borrow from banks could encourage them to embrace innovative financial solutions such as factoring and credit insurance.
A survey conducted by Bibby Financial Services (BFS) covering 1,650 SMEs in 11 countries in the wholesale, trading, manufacturing and service sectors has revealed the potential risk for bad debts. Small businesses in Singapore and Hong Kong reported the longest waiting periods for payment from customers, with average delays of 45 days and 41 days respectively.
Jackey Chu, managing director of BFS’s Hong Kong branch, said: “After they ship out the products and wait for their customers to pay, SMEs could find themselves in a dilemma of being short of money, unable to buy raw materials and produce for their next customers.” The time gap before they got paid could cause cashflow problems – and kill these small and medium-sized enterprises in the long term.
Additionally, when it came to accessing finance in the market, 19% of SMEs in Hong Kong said they found it hard to get loans easily, compared to just 9% in Singapore. The barriers ranged from stringent requirements and compliance, as well as high interest rates.
Chu said these sorts of difficulties led BFS, one of 17 non-bank factoring houses in Hong Kong, to encourage SMEs to try financing tools like factoring. Businesses could sell invoices like accounts they were due to receive to a factoring house, to meet their current cash needs.
“Based on the value of the invoice that SMEs assign to us, we will offer immediate cash up to 90% of the value,” he said, “while the other 10% will be redeemed when their customers pay”.
The third-party factoring firm profits by taking a certain percentage as a handling fee, and a discount fee.
If the customer fails to pay the invoice, BFS will also provide collection services, together with credit insurance and online accounts receivable management.
Chu said the advantage of financing via a factoring company was that they can tailor-make services for small companies. “There is no ceiling in factoring,” said Chu, meaning that they will provide as much cash as the business needs, not only the value of accounts due to be paid. They could also consider how the business would grow – compared to getting a bank loan, “when they will only loan out an amount based on the value of collateral”.
BFS is backed by a large pool of capital from its mother company, the Liverpool-based Bibby Line Group, founded in 1807, which specializes in marine and retail. So, Chu was confident that BFS has pockets deep enough to serve over 10,000 SMEs worldwide with a range of currencies.
Factoring has existed in Hong Kong for about 30 years but is still not a mainstream tool of financing. However, Chu believes the market is growing at a rapid pace – he expected over 20% year-on-year growth by the end of 2017. Volume of assets in the factoring market in Hong Kong reached US$50.63 billion last year.
And in China, the market size accounted for 54% of the total Asia-Pacific in terms of volume. Both the number of factoring participants and the volume were growing by multiples in China, Chu said.
Interesting to see emerging markets for factoring and invoice discounting. The horrendous late payment terms are clearly going to drive a growing demand. In our research 96% of UK companies using invoice finance told us that they thought that greater use of invoice financing would help tackle late payment culture.