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Oxford Funding tells small businesses not to lose against the house in a plunging property market

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Debtor finance solutions specialist Oxford Funding Business Cash Flow warns small businesses not to put themselves at risk in a waning property market.

According to Oxford Funding Head of Debtor Finance Rob Lamers, small business owners, particularly of start-ups often secure finance using the value of their homes, but the tepid sector may cost businesses vital funding and jeopardise their business prospects.

The Real Estate Institute of Victoria stated that demand remained subdued at auctions in Melbourne over the past weekend – for the fifth weekend in a row. The clearance rate was 59% from the 829 auctions reported last weekend, compared to the same weekend last year, which saw 990 auctions with a 72% clearance rate.

Lamers adds that the slowdown in the property market will affect business cash flow if a loan is secured by a property's value. With dropping auction clearance rates, a property may undergo a revaluation resulting in reduced credit.

For instance, a property previously valued at $1 million would typically attract 80% funding credit, allowing the business to borrow $800,000. Post-revaluation at $900,000, the business can only borrow $720,000.

While many small businesses have secured loans against property, Lamers believes it may not be the most appropriate long-term solution as credit would not increase with business growth. He advises that having the finance secured by the business is a far superior option over borrowing against property.

Additionally, the lack of separation between personal and business assets places increased risk and pressure on business owners.

On the other hand, debtor finance is credit secured against a business’s sales invoices, which are assets of the business and increases as sales increase. By leveraging the debtors’ ledger for funds, the business owner can reinvest in business growth without being restricted by the property market.

According to industry body The Institute for Factors and Discounters (IFD), the debtor finance sector grew 6.6% in the 2011 March quarter over the same quarter last year. While factoring turnover increased by 14%, the highest Australia has seen for the 12 months ending 31 March 2011, invoice discounting, the other type of debtor finance experienced a rise of 1%.  

Oxford Funding (a subsidiary of Bendigo and Adelaide Bank Limited) provides both factoring and invoice discounting products. Its turnover, up 21% in the 2011 March quarter compared with 2010, was well above average, with factoring experiencing a hike of 39% and invoice discounting up 6%.

Oxford Funding is well positioned in the current marketplace with both factoring and invoice discounting products.

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