SME

Have a plan to bridge short term cashflow dips

Every business should have a contingency plan to deal with an unexpected dip in cash flow. While simply having a business overdraft available provides some degree of short-term protection, it’s best to have an array of lifelines at your disposal. Also, we find that the overdraft gets used for everyday purposes rather than for unexpected problems.

Peer-to-peer financing is another clever route to addressing temporary dips in cash flow. Conventional peer-to-peer financing involves online companies lending to businesses from funds gathered through a pool of investors. These loans are usually quicker and more straightforward than conventional borrowing and there is no minimum amount, so they are perfect for topping up cash flow. Beware: some offer much better value than others: don't be taken in by headline rates, do some calculations or check with your accountant.

Another smart take on peer-to-peer financing is an online improvement on invoice ‘factoring’, whereby a business in need of cash sells its ledger to a bank or another conventional lender. The online providers in this area of peer-to-peer financing, which include InvoiceX, will buy (for 1.5-3% per month) individual invoices – allowing companies to easily draw specific, limited amounts – but avoid the hidden fees, long contracts and slow decision processes of traditional factoring providers. For working capital spikes, this is often a better ongoing solution than a short term loan which can cause more cashflow problems a few months later. Importantly, watch out for whether your customer needs to be notified.

"We are a young country that has to use its capital smarter" - Don Argus

Some wise words from one of our most experienced business people. Lending to small-medium sized businesses is shrinking at a time where we need them to grow.

There needs to be a real focus on what is constraining growth and the answer is not found talking to economists, we think. Any discussion with the management of a growing business turns to working capital very quickly. No growth finance, no growth.

What keeps former NAB boss and BHP chairman Don Argus up at night?

One of the most experienced executives in the country, Don Argus has concerns about lending standards. Nic Walker

by Stewart Oldfield

What scares the "hell out of" Don Argus, a former chief executive of National Australia Bank and former chairman of BHP Billiton?

Iron ore prices? Interest rate rigging scandals? No. It is interest-only home loans.

"It scares the hell out of me – the size of the debt people are taking on without principal repayments," he says.

The famously forthright executive says banks giving million-dollar home loans to young people had lost perspective. "It used to be very difficult to get a home loan in the old regulated banking environment," he says. "Now it's like a commodity."

According to data compiled by the Australian Prudential Regulation Authority, interest-only mortgage loan approvals peaked at a record 46 per cent of total mortgage loan approvals in the June quarter of last year. 

Since then, their proportion of total mortgage approvals has reduced to 37 per cent, still much higher than the level of five years earlier.

NEGATIVE GEARING

The Reserve Bank said last month that further falls were possible in the proportion of interest-only loans being written as some banks continued to phase in the tighter lending standards being demanded by regulators.

"Some further falls in the share of high-LVR [loan-to-value ratio] lending and interest-only lending in the period ahead could be expected," the RBA says.

Interest-only loans have been particularly popular among those buying homes for investment purposes. Such loans can allow high-income earners to maximise the benefits of negative gearing.

Argus' views on interest-only loans are taken seriously in banking circles because he built his career around being rigorous on lending standards in the late 1980s and early '90s, avoiding the disastrous commercial loan exposures that hobbled his peers.

He was appointed head of NAB's credit bureau in 1986 and took over the top job from Nobby Clarke in October 1990,  remaining in the role until 1999.

He became chairman of what was then called BHP Limited from 1999 until 2010, when he oversaw a tremendous period of expansion as the company reaped the rewards of the resources boom.

INDEBTED CONSUMERS

The level of indebtedness among Australian consumers and the government is a drag on economic growth, according to Argus. This is already being seen as stimulatory monetary policies around the world fail to inspire consumer spending.

 He says Australian consumers are among the most indebted in the developed world and the governments that have been  embracing interest-only loans will leave a terrible legacy for future generations.

Argus says a correction in house prices is inevitable, starting with the apartment market. But he is not predicting a severe credit cycle as last seen in the early '90s when corporate losses and inflated asset values brought several Australian banks to their knees.

"It may not be as severe because bankers these days do understand that free cash flow is important when assessing the risk profile of corporates," he says. 

"But it remains to be seen how their risk-assessment processes stand up when interest rates begin to rise again for small business and consumer customers."

 Argus says a target of a 15 per cent return on equity for banks could prove difficult to sustain. "In today's diminishing return world, one should not forget that our large bank balance sheets rely on funding from offshore markets and this can become expensive at maturity if overseas banks falter in the wake of slower economic growth."

SPOOKED

That said, he believes it is prudent for banks around the world to rely more on tier 1 capital rather than debt instruments such as hybrids, which could be questionable in terms of tax deductibility and subordinated to other forms of funding. 

"You can never have enough equity capital," he says.

Australian banks have been strengthening their capital positions in recent years in anticipation of APRA's measures to address the financial system inquiry's recommendation for their capital ratios to be "unquestionably strong" by international standards. The big banks raised $5 billion of common equity over the past six months. This increased their common equity tier 1 capital to about 10 per cent of risk-weighted assets as of December 2015, 1.25 percentage points higher than a year ago.

The capital positions of some are also being supported by asset sales.

Argus says Australian banks have an important advantage over overseas ones, particularly in the US, given their relatively high level of non-interest-bearing and fixed‑term deposits. He attributes this to Australian consumers still seeing banks as safe havens compared with some of the collapses that have occurred offshore.

He has previously warned that a royal commission into banking conduct in Australia could spook foreign lenders at a time when domestic banks depended enormously on offshore lending.

GEOGRAPHICAL ADVANTAGE

He highlights the strengths of several Australian-listed companies. Macquarie Bank's fee-based business model, he says, is "probably as good an investment banking model that you will see".

BlueScope Steel has successfully reinvented its business model, while Amcor has demonstrated a record of consistent wealth creation. He also applauds Transurban's initiative in taking new infrastructure proposals to the Victorian government.

Argus says Australia's geographical position on the doorstep of Asia ensures the nation has a magnificent future as long as we take full advantage of its strengths, for instance in primary industry, education and health. 

"We are a young country that has to use its capital smarter," he says.

However, he is critical of the performance of governments since 2007. "We have managed to record a series of budget deficits, which leaves us with public debt, which will get the attention of the rating agencies, and the investments undertaken have hardly been productive.

"Going forward, if one thinks that one can ramp up GDP growth by spending billions on non-productive initiatives and promising unfunded activity, which only add to our fragile financial position, then we are in for some rough times ahead."


Read more: http://www.afr.com/personal-finance/shares/what-keeps-former-nab-boss-and-bhp-chairman-don-argus-up-at-night-20160420-goayvr#ixzz49Aqrvks9 
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Invoice trading is booming in Australia, according to a report by KMPG, University of Sydney, Cambridge University and Tsinghua Graduate School

As reported in The Australian today, in the first Asia-Pacific report surveying Alternative Finance published this week, it is notable that, relative to consumer lending, alternative business finance and, in particular invoice trading, has developed much more strongly in Australia than in the US and the UK.

We are quoted in the article as noting that this underlines the exceptionally under-served nature of the Australian small business lending market, which at the recent Altfi Summit in Sydney was estimated to be seeking an additional $95bn of finance.

This trend is also reflected in RBA lending statistics which show property loans since the GFC have grown by $538.7bn (+54%) while business lending has increased by just $72.5bn (+9%).

(RBA Statistics: Business Credit Seasonally Adjusted: $765.5bn in December 2008 to $838.0bn; Housing Credit (Owner Occupied and Investor) $992.9bn to $1,531.6bn)

KPMG’s endorsement of invoice trading will go a long way, but regulation is what really builds trust in a sector. The truth is, unlike consumer lending, a sandbox won’t accelerate the development of innovative new business finance products – but increased involvement from and endorsement by the gamekeeper will accelerate business adoption.

The government’s most pressing need now is to accelerate the adoption of alternative finance by SMEs, which would provide a kick-start to our economic growth. Introducing disclosure standards as to the cost of finance and terms and conditions of finance – similar to comparison rates for mortgages – is a simple step to take, but would dramatically change the reputation of the sector.

It’s clear that the regulatory environment needs a 21st century approach, and the government seems to be aware of this, but we are all waiting to see words turn into action. We’re in a similar position to when the SMSF market first emerged – the regulators had to rapidly come up with a new approach then, and the need is even more pressing now with the increased speed of the development of new business finance products.

As Paul Keating said: “When we laid the foundations for the current superannuation system in the 1991 Budget, I never expected Self Managed Super Funds (SMSFs) to become the largest segment of super. They were almost an afterthought added to the legislation as a replacement for defined benefit schemes.” 

Time to get wriggle on!

  

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SME finance in Australia is changing for the better thanks to P2P/marketplace lending

Oz P2P Lender Releases Loan Book

By Guglielmo de Stefano on 2nd February 2016
 

Invoice trading platform InvoiceX publishes its loan book as part of its plan to boost transparency.

Australian online invoice trading platform InvoiceX today announced the publication of its loan book, containing tons of data on more than $6.5 million of invoice trades from November 20th 2014 – when the platform launched – to 31 December 2015. According to the data, the company is on track to trade over $50 million worth of invoices in 2016.

Founded by Dermot Crean and Steve Yannarakis, the company is strongly placed to help small and medium enterprises (regardless of their business sector) to deal with working capital pressures. Its primary product – the Match Maker Trading Platform – rapidly matches investors with businesses, optimising the deal for both parties. InvoiceX assures the total absence of set-up fees and a straightforward application process. The company aims to provide a cash advance – up to 85% of the Face Value of an invoice – within 24 hours.

Dermot Crean, co-founder and director of InvoiceX, commented:

“Greater transparency is key to taking P2P lending mainstream, both for businesses and consumer loans. It is our hope that release of this data will prompt other P2P lenders to take the same action. We want to ensure that all business owners in Australia who are eager to grow have access to transparent and fair finance which puts the rights of borrowers at the centre of the lending process.”

Since inception, InvoiceX has facilitated 201 trades for SMEs with an average trade face value of $33,098, an average discount fee of 1.2 per cent per calendar month and an average settlement period of 35 days. The platform is keen on highlighting the differences between its business model and a normal factoring provider. Traditional factoring involves long lock-in periods, much higher costs and the losing of control of sales ledgers and collections. Conversely, InvoiceX’s product is totally confidential, with no lock-ins and a good deal of flexibility.

According to Dermot, the release of this data is indicative of a maturing P2P lending market in Australia. He said:

“The public release of this lending data will allow businesses to make easy comparisons between P2P lenders, and also directly with traditional finance options such as term loans and mortgages. […] Greater transparency is key to taking P2P lending mainstream, both for businesses and consumer loans. It is our hope that release of this data will prompt other P2P lenders to take the same action.”

It’s widely acknowledged that transparency is a key pillar of the Alternative Finance Space – essential to ensuring the sustainable growth of the asset class and to demonstrating that alternative finance platforms are behaving responsibly.

InvoiceX claims to be the first P2P Australasian platform to publish its loan book. “It's great to be the first to do this ever in Australian SME finance,” said Dermot. RateSetter Australia, following in the footsteps of its UK-based progenitor, uploaded its complete loan book online last October – although this resource is updated on a quarterly basis. On a global scale, many players have already disclosed their data, including the likes of ZopaFunding CircleRateSetter and MarketInvoice in the UK.

Aside from increasing the public’s opinion of the sector, data is critical also from a practical perspective, allowing for the construction of indices, such as the The Liberum AltFi Returns Index (LARI), which will likely come to form an essential component in the maturation of the sector.

AltFi Data today added an Australasian section to its Resources page, providing a link to the InvoiceX loan book, which is accessible here. We suspect that InvoiceX may have company in the Australasian section before long.

Why do growing companies fail?

Most growing companies in Australia are starved of cash, constantly running the gauntlet of paying payroll and keeping the Australian Tax Office and other creditors at bay. Why?

The insolvency statistics published by ASIC tell a sorry tale. In the latest report covering the 2013-14 financial year, 9,459 initial external administrator reports were filed with 22,606 nominated reasons for failure. The reasons given break down as follows:

Company failures FY14
Company failures FY14

So according to ASIC, at least 30% of companies in Australia failed during the 2013-14 financial year due to cashflow issues.

In our experience and speaking to experts, most growing businesses underestimate how much permanent capital they need to raise to fund their growing book of unpaid sales invoices.

Rapid growth and the extra demands it places on working capital usually puts businesses under cash flow pressure. It's mathematically certain unless you're in a business where your customers pre-pay for what you sell them!

In some cases businesses struggle through, in others they fall over in the growth phase. It is important to understand that you cannot grow without planning on how you will fund the growth. Generating profits to fund it on your own will take too long.

Before aiming for growth in your business, you need to understand and address several issues, including:

  • Cash flow optimisation - very important in the short and long term. You need to understand:
    • Your cash flow cycle
    • The demands of extra trading stock
    • The impact of increasing debtors
    • The effect and timing of your basic operating costs.
    • Cash flow forecasting - essential for any well run business, this involves developing realistic projections for your operational budgets. Sensitivity analysis will help you forecast the impact of errors (10%, 20% or 30%) in your assumptions.
    • Capital management - start by identifying how much capital the business needs and how much is being provided by the available sources. Your business is only funded from capital, debt, and retained profits and in the early days of the business there are no retained profits, so it comes down to capital and debt.

From the start there is a continuing requirement for capital management. This is about understanding:

  • The initial requirements or establishment costs of the business
  • Additional capital that will be required to fund growth
  • The timing and amount required to replace or upgrade capital equipment
  • Funding required to repay loans and retire debt
  • Taxation requirements
  • The expectations of the shareholders for access to profits

None of these items appear in the operating budgets of your business, yet each of these draw cash from the business. You could have a profitable business and be cash flow positive from operations, yet be under significant cash flow pressure. If you want to grow your business successfully, then a capital management plan must be regularly reviewed and a capital expenditure budget should be prepared each year.

Our Growth Check-Up Tool highlights how much more cash becomes tied up in your invoices as you grow - cash that you will need to pay suppliers and cover other operating costs.