Factoring: the perceived role in cash management for New Zealand SMEs

Abstract

This study presents an investigation into stakeholder understanding and perceptions of factoring as a cash management tool for small and medium sized enterprises (SMEs). A literature review confirmed that factoring can benefit SMEs cash-flow and debtor management, but also identified that its under-utilisation or improper use may stem from misunderstandings and perceptual blocks held by stakeholders making cash management decisions (i.e. SME owner/operators, business advisors and factoring companies). Therefore, research was undertaken which: investigated factoring utilisation analysed patterns and themes with respect to perceptions in the marketplace developed a model of factoring perception. The study confirmed that there was a general agreement in the marketplace that factoring is under-utilised, poorly understood and suffers from a poor image. From the findings, a factoring maximisation model was developed, demonstrating how perceptions should be changed in order to maximise factoring's effectiveness in the New Zealand marketplace. These findings are useful in guiding factoring companies engaged in promoting factoring in the marketplace. It also highlights the deficiencies in SME owner/operators' and business advisors' understanding of factoring which is limiting their ability to optimise their cash-flow financing decisions.