Property market plunge jeopardises small businesses

A waning property market will put a number of small businesses at risk, according to Oxford Funding CEO Rob Lamers. Small business owners, particularly of start-ups, often secure finance using the value of their homes, but the tepid sector may cost businesses vital funding.

According to the Real Estate Institute of Victoria, for the fifth weekend in a row, demand remained subdued at auctions in Melbourne over the past weekend. The clearance rate was 59 per cent from the 829 auctions reported last weekend, compared to the same weekend last year which saw 990 auctions held and a clearance rate of 72 per cent achieved[1].

"The slowdown in the property market will affect business cash flow if a loan is secured by a property's value," said Lamers. "Now that auction clearance rates have dropped, a property may undergo a revaluation that results in reduced credit."

A property previously valued at $1 million would typically attract 80% funding credit, which means the business could borrow $800,000. A revaluation of that property to $900,000 would mean a business could only borrow $720,000—a significant reduction of $80,000.

Lamers said many small businesses secured loans against property, but this may not be the most appropriate long-term solution, as credit would not increase as the business grew.

"It's better to have finance secured by your business, not your home, which doesn't grow to match your business," he advised. “Moreover, the lack of separation between personal and business assets places increased risk and pressure on business owners.”

"Debtor finance is credit secured against a business’s sales invoices, which are assets of the business and increases as your sales increases. By leveraging your debtors’ ledger for funds, you can reinvest in business growth without being restricted by the property market.”

The debtor finance sector grew 6.6% in the 2011 March quarter compared with the same quarter last year, according to industry body The Institute for Factors and Discounters (IFD). Of the rise, factoring turnover increased by 14%, the highest Australia has seen for the 12 months ending 31 March 2011. The other type of debtor finance, invoice discounting, experienced a rise of 1%.

Oxford Funding (a subsidiary of Bendigo and Adelaide Bank Limited) provides both factoring and invoice discounting products. Its turnover, up 21% in the 2011 March quarter compared with 2010, was well above average, with factoring experiencing a hike of 39% and invoice discounting up 6%.

"Having both factoring and invoice discounting products means Oxford Funding is well positioned in the current marketplace," said Lamers.

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About Oxford Funding

Oxford Funding, a wholly-owned subsidiary of Bendigo and Adelaide Bank Limited (ASX: BEN), is a specialist provider of debtor finance or cash flow solutions to small and medium enterprises. Since its inception in 1994, the company has continued to remain at the forefront of the Australian debtor finance industry due to its flexibility, innovative product portfolio and commitment to best practice service delivery. Oxford is a member of Factors Chain International (FCI). www.oxfordfunding.com.au

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[1] Figures from REIV website http://www.reiv.com.au/home/inside.asp?ID=142