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SME’s seek alternative funding despite interest rate drop

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Only 51.1% of SME’s are now considering borrowing in the next six months, down from 77.1% recorded a year ago. According to Peter Drennan, East & Partners’ financial markets analyst: ‘The bottom line is that funding is becoming more expensive for SME business bank customers despite a backdrop of central interest rates and federal government rhetoric.’

More expensive than 12 or even 24 months ago? No. A more likely scenario is that borrowings will continue to be scaled-down until the economy shows stronger signs of rebounding. But this is still a generalized view. Key infrastructure sectors such as transportation and construction are already enjoying renewed growth. Drill-down and what becomes evident is that Australian SME’s will continue to be stymied because of the types of restrictions banks place on loans as well as the lack of alternative sources of funding – irrespective of fluctuations in interest rates.

PKM Group, a small container transport company located in Sydney’s south west had aspirations for growth. An organic increase in the demand for its services coupled with the announcement of an expansion to the Port Botany Container Terminal, reported to be $A535M, cemented its plans to purchase an additional 22 trucks.

According to Kerry Hudson, MD, Leaseworks Australia Pty Ltd, banks are in a defensive mode. ‘Funder credit criteria has tightened. All of our customers have been affected. If they (the banks) consider an industry risky, they’re not even interested in considering the assets of a business or the strength of its books.‘The Bank’s view was that increases to fuel prices and interest rate fluctuations make transport companies like them (PKM) a risk,’ she said. She added that this was ‘despite the fact that PKM had ‘world class debtors.’ Irrespective of world class debtors, PKM had a ‘lumpy revenue stream’ which Kerry contended: ‘caused cash flow problems.’

Unable to secure a bank loan, Kerry investigated the viability of securing funding from an alternative financial provider. According to the Institute of Factors and Discounters (IFD): ‘The Australian Invoice Finance Industry had a turnover of $65B in the 12 months to June 09.’

Invoice financiers assess funding on the strength of a company’s receivables as opposed to the traditional (banking) approach of determining asset strength. Knowing that PKM’s accounts receivables were strong, Kerry approached invoice finance provider AR Cash Flow , who approved a $625K line of credit per month based on both current and forecasted receivables generated by the company.

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