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Receivables finance for SMEs

Sep 30, 2009

AS THE saying goes, you need money to make money. So there comes a time in the life of most SMEs when they need to access additional funds to take their business to the next level.

For many SMEs, their priority is to maintain sufficient funds to take on bigger orders or to support their entry into a new market. The more working capital a SME has available, the more options it has to grow.

The team at HSBC Commercial Banking adopts an industry-specialised relationship management approach which enables them to better understand the business and financial needs of SME customers and in turn determine which form of financing is best suited for them.

Much will depend on where the company is in its life-cycle as well as what the money will be needed for.

Mr Raymond Tan, Head of Receivables Finance in HSBC Singapore, believes SMEs can benefit from an increasingly popular financing vehicle called Receivables Finance, also commonly known as Factoring, to better manage their cashflow.

An important element of Receivables Finance is that it is not dependent on the physical assets the company has at its disposal.

'HSBC offers a solution called Receivables Xpress with which SMEs can obtain working capital financing by converting their account receivables into cash without the need to pledge any tangible collaterals,' Mr Tan said.

'A company's accounts receivables are important assets. But in times of economic slowdown, many SMEs find it harder to get the money in quickly, as debtors will often drag their payments in order to protect their own cashflow.

'It is like trying to get a friend to return money they owe you. You will get the money back eventually, but you may have missed an opportunity or two while you are waiting.

'With Receivables Xpress an SME can turn today's sales invoices into tomorrow's cashflow by unlocking the potential of its sales ledger,' said Mr Tan.

According to Mr Tan, Receivables Xpress is suited for companies that need money quickly.

'Most SMEs wait 60, 90 or 120 days and longer before their sales are converted to cash. With Receivables Xpress the money can be available one working day after the application is made and approved.'

HSBC will advance up to 90 per cent of the net invoice value to the SME. The bank will then collect the money owed by the debtor, retire the advance made and credit the balance into the SME's account.

With the availability of this funding option, SME can gain access to the cash to pursue business opportunities to expand and grow. And Receivables Finance is a cost effective working capital solution as compared to traditional overdrafts or loans.

'SMEs can unlock the intangible value on their balance sheet without having to rely on property, machinery or inventory.

'Receivables Finance is geared specifically towards a company's growth in account receivables, so it is linked directly to the growth in sales of the business.

'So as the company grows its sales, the more value it has in its balance sheet and the more cash can be unlocked through Receivables Finance,' added Mr Tan.

It is also possible to have the bank do the debt collection on behalf of the SME, including but not limited to phone calls and emails. This allows the SME to focus its resources away from debt collection and into the important task of growing the business.

There will always be situations where a debtor cannot pay due to insolvency or protracted default. SMEs can consider taking out a credit cover to protect themselves against potential losses when these situations arise.

This is sometimes referred to as 'without recourse' Receivables Finance as it gives SMEs a way of avoiding any unforeseen difficulties in cashflow as a result of a potential debtor's default in payment.