Small to Medium sized Enterprises (SME) are the lifeblood of the South African economy but regardless of whether businesses are feeling the slow-down effects of the global recession or are fortunate enough to be caught in an unexpected wave of growth, the failure rate is significant as a result of poor cash flow management. One of the many reasons for this is these SME’s are heavily dependent on the customer’s willingness or ability to make payment on time. An inconsistent debtor’s cycle has left many business owners with little option but to seek out alternatives for better cash flow management such as debit-order facilities. However, the ripple-effect of the worldwide credit crunch has led to more restrictive criteria imposed by the traditional financial institutions so access to banking facilities involves considerable collateral and red tape.
South Africa’s recovery, as in the rest of the world, depends on businesses being able to access the facilities they need to stabilise their cash flow and of course, to grow. This just isn’t possible for many SME’s who can’t afford the restrictions imposed by the banking sector. Fortunately, whilst many of the obstacles to economic recovery appear daunting, a creative approach with “out of the box” thinking can produce results.
Traditional banks are sure to maintain their restrictive mind-sets, especially with economic conditions uncertain for the foreseeable future but retention-backed facilities from independent financial services providers should be seriously contemplated. A substantial portion of the private sector is transacted each year locally through these products offered by specialist financial institutions.
Such arrangements acknowledge the fluctuating financial needs for businesses in varying stages of growth. Quite opposite to the rigid expectation from traditional banks, which often require five (5) times the required facility as collateral, these financial products require a percentage (often 10%) of the collection to be held for the relevant debit order collection, which allows for the facility to fit into the ebb and flow of the company’s turnover. By way of example – when an SME secures a contract to supply services to a customer, the joy of landing a new account quickly turns to a financial nightmare as the customer holds payment which begins to play havoc with the cash flow of business. Cash flow arrangements such as implementing a debit-order collection can smooth that cycle, ensuring the business survives any growing pains.