WHAT do fast-growing small businesses in Singapore do when they need money quickly? More and more, they are turning to a specialised financing scheme known as factoring.
Industry watchers say the factoring market here - dominated by the likes of IFS Capital, DBS Bank, OCBC Bank and GE Commercial Finance - is projected to grow by 10 per cent a year in the next three years, on the back of the integrated resorts boom.
Demand will come mainly from firms dealing in construction, say industry players.
With the building of mega projects like the integrated resort soon to take place, these firms, they say, will need quick cash to smooth out their cash flow, cover increased expenditure for raw materials, and pay for new hires.
How does factoring work?
Suppose you are owed $10,000 by a firm which you expect will pay in a couple of months.
You sell your invoice to institutions that offer factoring plans, such as a bank like DBS or a factoring house such as GE Commercial Finance, and they will lend you $8,000 immediately.
They will collect and keep the full $10,000 two months later.
The duration and amount dispensed vary according to your business' financial health. They also depend on the debtor's profile - in this case the firm which owed you money.
As with other loans, there is an interest charge applied to the money lent to you, to be paid to the factoring firm.
The estimated size of the factoring market in Singapore is $6.5 billion, with the global market worth about $2.4 trillion. Banks say it has been growing by 6 per cent annually over the last five to six years.
DBS, say industry watchers, is the largest in terms of market share, with more than a quarter of the factoring pie.
DBS managing director and head of corporate and enterprise banking, Mr Edwin Khoo, said he expects more than 10 per cent growth in factoring volume this year. 'Over the next few years, demand from the construction sector is likely to outstrip demand from other industries,' he said.
Mr Khoo added that as more and more small and medium-sized enterprises (SMEs) are expanding overseas, they are also demanding export factoring services. This variation of factoring basically helps them generate immediate cash while doing business abroad.
The president and chief executive of GE Commercial Finance in South-east Asia, Mr Ed Ng, said its business is growing at a rate exceeding 20 per cent a year. It has more than 10 per cent in terms of market share.
Two main factors have helped to boost the demand for such services: SMEs' increased awareness of an easy way to turn their invoices into cash; and the nation's strong economic growth, with unemployment at a six-year low.
But Mr Ng feels that more can be done to educate SMEs on factoring: 'We still come across SMEs which don't know they can get cash immediately. You don't need to be hamstrung by lack of cash.'
Seksun chairman Felix Ong recalls how his firm, a metal-stamped components supplier, used factoring about 20 years ago to help the business grow.
'We needed people and we needed to pay their salaries,' said Mr Ong, who does not use factoring any more as the company's cash position is strong today.
What is factoring?
How it works
For example, a firm owes you $10,000 which is due in a few months.
You sell your invoice to institutions that provide factoring services.
You will be lent $8,000 immediately.
Two months later, they will collect the full $10,000 from the debtor firm and keep it.
The duration and amount dispensed vary according to your business' financial health, and also the debtor firm's profile.
An interest charge is applied to the money that is lent, which you will pay to the factoring company.
Why it is gaining popularity
SMEs' increased awareness of an easy way to turn their invoices into cash.
Singapore's strong economic growth, with unemployment at a six-year low.
