Trade terms for the mining industry, while improving slightly in the past five months, are still almost double the 30 days once considered the norm.

Earlier this year, financial analysts Dun & Bradstreet said the mining industry was the slowest paying industry for the month of February, and that trade terms had increased by almost seven days since February 2005, to (on average) 61 days.

The second-slowest paying industry was manufacturing, with transport and communications tied as the third slowest at 59 days. The fastest paying industries were agriculture, forestry and fishing.

Fast forward to July, and the mining industry was still the slowest paying industry, at 58 days, once again followed by the manufacturing industry at 55 days. But these trade terms still exceed the standard 30-day payment period by at least 25 days.

According to D&B, this represents continuing cash flow and credit risks for all businesses, with small businesses – such as mining industry suppliers and contractors – most likely to feel the impact.

Traditionally, the regular cash flow of a business is maintained by a reliance on an increased overdraft to ensure operations carry on as normal. But when that overdraft reaches its limits, and bills and staff need to be paid, more options need to be explored.

One option gathering favour within the mining industry is factoring. In short, it is the process of turning credit sales into cash sales. In other words, it is the sale by a business of book debts to a third party in exchange for immediate cash. The third party, called the factor, then manages the sales ledger and the collection of accounts under the terms agreed by the business.

The mining boom, and in particular the skills shortage, has resulted in a distinct increase in the number of businesses utilising factoring.

Tony Della Maddalena, of factoring company Key Factors, told Australia’s Mining Monthly the skills shortage was such that sub-contractors were finding it difficult to find staff, and have to pay temporary staff on a weekly basis.

“Mining companies pay, on average, every 38 to 42 days,” Della Maddalena said. “So there’s a lapse in time but they need to have the funds on hand. With all the sub-contractors and SMEs [small to medium-size enterprises] getting contracts to supply to the mining industry, they haven’t got enough security in their homes to facilitate an increase in their overdraft. Therefore they have to seek different funding from different sources.”

Maddalena believes the companies that benefit most from factoring are usually those that are rapidly expanding; those with profitable but slow paying clients; and/or any small to medium-size companies looking to improve the regularity of their cash flow.

“Small businesses dealing with the mining industry supply their debtor ledger to a factoring company, and the factoring company turns around and gives them cash upfront, instead of them having to wait 30 days,” he said. “The fee ranges from 1.5% to 3% a month, depending on the debt and the company involved.”

Factors do not have to be independent companies; they can also be subsidiaries of major banks or financial institutions. But regardless of their size or origin, factoring companies will always require a complex agreement with their clients.

The first steps usually involve a meeting with the potential client and the factoring provider, a review of the client’s financial situation and careful study of the client’s business plan to evaluate its suitability for factoring.

Once the company is deemed suitable for a factoring service, most (if not, all) accounts receivable are taken on by the factor and the business immediately becomes financially better equipped to handle sudden increases in orders and/or rapid expansion, such as the purchase of plant equipment and inventory.

According to an article in the current Australian Financial Services Directory, factoring is usually a seamless, confidential service, where the customer of the business is unaware of the relationship between the business and the factor, and all communication between the factor and the customer is branded as the business.

The AFSD article did highlight a number of pros and cons of factoring. As with all business finance, it said factoring offers advantages, disadvantages and potential pitfalls, and that the level of benefit from factoring will vary from business to business.

But it said factoring usually provides:

Immediate cash flow access to 70-90% of the value of debtor invoices;

Working capital for growth without requirements for a strong balance sheet or substantial net worth;

A good interface with the supplier and, as a result, a seamless transaction for the customer;

Outsourced debtor administration and associated cost savings;

The ability to increase sales by offering credit the business may have been unable to fund otherwise;

The ability to take advantage of creditor discount terms, improve credit rating by being able to pay creditors promptly and an enhanced ability to capitalise on larger orders as required; and

The option to free up property from being tied as security.

Benchmark Debtor Finance managing director Peter Langham told AMM most of his clients who were involved in the mining industry were suppliers of labour for maintenance and shutdown, and suppliers of hire equipment and protective gear.

“Because the mining industry is booming, they’re growing quick and they’ve got to keep paying their wages and their suppliers on time,” Langham said. “You’ve got to pay welders, for example, weekly, or fortnightly if you’re lucky.

“But if you’re dealing with someone like BHP, their trading terms are 30 to 60 days. So [without factoring] you’ve got to carry that on your books until you get paid.”

Institute for Factors and Discounters of Australia and New Zealand executive officer John Bills said there had been strong growth in the Australian factoring and discounting industry, but proportionately, the growth of factoring in the mining sector had been even stronger.

In the 12 months to March 31, 2001, Bills said, factoring turnover in the mining and agriculture sector was $230 million. Five years later, that figure had jumped to $830 million.

“It just gives business another funding alternative,” Bills said. “Ten years ago, the Australian factoring industry [as a whole] was turning over $3 billion a year. It’s now around $40 billion a year.”

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