30 Jun 2004 :

Debtor finance, once the bastion of the clothing, textile, footwear and furniture industries, is fast becoming a sought after financing vehicle for the South African services industry, amongst others. This shift bodes well for the local economy as companies seek low-risk means to expand.

According to Preggie Pillay, the Head of FNB Corporate Debtor Finance, a shift in the banking model has been a large driver in the move to use debtor finance.

“The reality facing companies today is that there is far less one-on-one interaction between bank managers and clients.  Ten years ago, a loan or overdraft was often granted purely on the relationship between the bank manager and the MD of a company.”

“Now, loans and additional credit are granted on merit.  Tangibles are examined and decisions made.  This has made it significantly more difficult for companies to lay their hands on ready cash.  However, a company’s debtor book is technically a cash base which can be borrowed against, and more companies are using this to access credit,” explains Pillay.

This means of raising cash has become a good way for companies looking to expand and to raise the capital to do so and Pillay says the debtor financing industry has seen some good growth over the last decade.

“We have seen growth in debtor finance, especially in the services industries, which historically have not made much use of this facility, as the current economic climate has favoured the entrepreneur.  This is also evident in the expansion of the outsourcing sector, which has mushroomed over the years as companies have become more focused on the key components of their businesses.”

Pillay says this shift has also forced the financial institutions to revise how they assess a company applying for debtor finance.

“We have had to re-look our assessment methods.  While we would have examined tangible assets in the past, we are now examining non-tangibles for the services industry.  There is a big difference between assessing a furniture business, which deals in tangibles, as apposed to a public relations agency, which deals in non-tangibles.”    

“These new methodologies have given us the scope to confidently service a much broader client base.  They have also led to more service companies seeking our advice and help,” he says.

Pillay reckons the increase in debtor finance bodes well for the economy, as it is a good indication of a move toward growth and expansion.

“Our experience has shown that South African companies are looking for innovative ways of growing their businesses.  We are seeing many businesses looking for cash to take a bigger step into both local and foreign markets and this can only be a healthy indicator for GDP growth in the future,” Pillay concludes.

FNB Corporate is a division of FirstRand Bank (Ltd).