Bibby Financial Services - Flexible Cash Flow Solutions calls upon the Reserve Bank of Australia (RBA) to be ready to cut interest rates, given the uncertain economic environment ahead.
Fresh data from the RBA reveals a decrease in business credit of 0.3% over October 2012, against an increase of 3.3% in the 12 months to October. Gary Green, Director of Bibby Financial Services Australia believes that lower interest rates would help boost confidence levels and borrowing by small and medium sized businesses.
He points out that business credit recovery during 2012 has been led by larger businesses, particularly listed companies, while borrowing by small businesses has been stagnant due to difficult trading conditions. A further cut in official interest rates would help boost small-business confidence and help to prompt greater levels of business investment, which has been restrained by worries about economic growth.
The RBA data suggests the cost of borrowing probably remains too high for SMEs. In addition to a lack of confidence about the economic outlook and their ability to repay debt, SMEs also fear their customers or suppliers could become insolvent in this sluggish environment, as revealed by the Bibby Barometer Small Business Survey.
Bibby advises all SMEs to increase their focus on cash flow and working capital, particularly with the upcoming Christmas holidays.
According to the RBA, the outstanding value of bank loans larger than $2 million increased by 10.5% from June 2011 to July 2012 after declining over the previous 2.5 years. However, the outstanding value of loans valued at less than $2 million has remained largely unchanged since 2009.
Mr Green believes lower interest rates would likely bolster the use of debtor financing by SMEs, which has been gaining in popularity in recent times. He also noted the increased average size of debtor finance facilities evident from the Institute for Factors and Discounters (IFD) statistics, suggesting that debtor finance is gaining acceptance amongst increasingly larger SMEs.
Debtor finance allows a business to quickly convert its unpaid invoices into cash. In a typical facility, the lender (or ‘debtor financier’) will advance 60-80% of the face value of the business’ invoices within 24 hours, with the balance returned to the client on payment by the debtor. In some cases the lender also provides an accounts receivable service, helping to save time and cost.
Over the year to September 2012, there was a 13.9% rise in the level of debtor finance or factoring, while the number of businesses seeking such finance had grown by 3.8%, according to data from the IFD. In NSW alone, debtor financing jumped by 48.2% from a year earlier, a trend that indicates debtor financing is providing new levels of support to Australian businesses.