More firms turning to quick-cash financing scheme

More firms turning to quick-cash financing scheme

Factoring market expected to grow at annual rate of 10% for next three years
By Gabriel Chen

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.
Source : Straits Times - 01 Oct 2007

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Firms resort to bank loans amid jittery bond market

Firms resort to bank loans amid jittery bond market

Plunge in funds raised through bonds in wake of sub-prime crisis
By Lee Su Shyan, Assistant Money Editor

SINGAPORE firms in need of funds might have to keep turning to bank loans until jitters over less traditional forms of credit clear.
The tightening of credit conditions and the increasing number of risk-averse investors in the wake of the United States sub-prime crisis, mean firms must offer better pricing to get people to buy bonds.

Those needing funds may have to turn to bank loans instead.

The result: The local bond market has been clobbered by the global financial turmoil of recent weeks, according to Thomson Financial’s figures.

A record US$3.7 billion (S$5.5 billion) was raised by Singapore firms in the bond market in the three months ended June 30, but this fell to US$533.8 million in the latest July to September quarter.

One casualty was convertible bonds. These usually pay the holder interest, but they also give buyers the option to exchange the bonds for shares in the company.

One mainboard-listed firm said it decided against a convertible bond issue. This was because the premium that had to be offered to bond holders was so attractive that they could have ended up owning 40 per cent of the company at the end of the exercise.

Some of the largest convertible bonds this year include a US$655 million one from CapitaLand and GuocoLand’s US$456 million instrument, both handled by JPMorgan. These formed part of the record US$1.5 billion raised from convertible bonds in the second quarter.

But in the third quarter, only US$110.4 million was raised from two convertible bond deals. These took place in July - property developer SoilBuild Group Holdings’ $60 million, four-year issue and KS Energy Services’ five-year, $96.8 million zero-coupon convertible bond.

There were no convertible bond issues recorded for August - when the force of the sub-prime panic was first felt - or for last month. Golden Agri-Resources postponed a US$400 million convertible bond issue last month.

Mainboard-listed Pine Agritech announced a 2.3 billion yuan (S$456.6 million) convertible bond issue in July, but Thomson Financial did not include this as the firm is classified as a China business.

Mr Philip Lee, the chief executive of JPMorgan’s investment banking unit in South- east Asia, said: ‘For the first six months of this year, volumes have been extraordinarily high. The market seems to be taking a breather and a ‘wait-and-see’ attitude.

‘Even though August is traditionally a slow month, the credit market conditions and the volatility had a further impact on volumes.’

But the issue does not seem to be a lack of funds.

DBS Bank head of fixed income Clifford Lee said: ‘General bond issuances have been put on hold due to the lack of price transparency in the market, not for a lack of available funds, especially in Asia.’

He added: ‘The loan market in Asia is more insulated from the credit market volatility as the banks in Asia are still cash-rich and under-lent in the region.’

Mr Lee also said companies ‘are backing off until it becomes clearer where credits will be re-priced to’.

Bankers say the next few weeks will shed more light on the prospects. JPMorgan’s Mr Lee said: ‘Hopefully, the credit market conditions will stabilise in October and the volumes will make a return.’
Source : Straits Times - 01 Oct 2007

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