Balmain and Allco expand factoring joint venture

In buying Scottish Pacific from St George Bank, BA Venture, a joint venture between commercial loan broker Balmain Commercial and Allco Finance Group, aim to bring scale to the fragmented market for debt factoring.

Michael Holme, executive chairman at Balmain Commercial, said "The strategy is pretty simple, Balmain Commercial and Allco Finance Group own Benchmark Debtor Finance, a well established debtor finance business.

"We saw the Scottish Pacific business allowing us to increase scale in that sector, and we saw it (the purchase) as good value and a way of growing the Benchmark business by marrying the two businesses together, gaining greater scale and a much stronger position in the debtor finance market."

The acquisition will allow the joint venture to increase market share in the eastern states, as Scottish Pacific is larger in Brisbane than Benchmark with similar operation sizes in Melbourne, but has only limited exposure in Western Australia where Benchmark has a much stronger presence.

Holme said the BA Venture business is across the SME sector and they (St George) wanted to hold onto the invoice side to service much bigger corporate borrowers.

Debtor finance uses factoring or discounting methods to calculate lending against the trade ledger, and is sometimes referred to as receivables finance.

Some lenders will offer only the discounting method, which currently accounts for more than 90 per cent of the market.

According to John Bills, secretary at the Institute for Factors and Discounters Australia and New Zealand, factoring and discounting is "A way for a company to fund their business without increasing borrowings, and a way for their growth to become self financing."

This means turning a problem, which is unpaid invoices, into cash.

Bills continues, "Factoring is usually for smaller businesses, and in addition to getting the cash, you can also get the factor to look after the debtor accounting.

"They will look after the book work for you. It's a way of outsourcing your accounts receivable, for which you will be charged a fee."

Holme considered the expanded entity as having "quite a nice mixture", and "marrying the businesses together we gained much greater exposure across geographic Australia."

The deal is financed by a mixture of cash and debt, with Holme adding, "It is well within our capacity (Balmain Commercial) and well within Allco's capacity."

On the question of whether there are there any other acquisitions in mind for the joint venture, Holme responded "Well it is fair to say that Balmain and Allco are very interested through the JV in the SME market.

"As Balmain is very active in the commercial mortgage sector, and Allco is a large financial structuring business, we see the opportunity to use the Benchmark Debtor Finance and Scottish Pacific businesses as a platform to move further into the SME market.

"We are very interested in equipment finance and very interested in property finance."

Balmain Commercial was established in 1980 by Holme, with organic growth the main driver in the company's expansion which now writes over $4 billion in loan products annually, with finance facilities ranging from small residential projects to commercial loans in excess of $100 million.

Products include investment loans through to construction finance facilities, including mezzanine debt finance, residual stock line loans, working capital finance and site acquisition loans.

Holme views Scottish Pacific as being a better niche fit for Balmain Commercial compared to St George, as "Factoring is a very people-intensive business and banks are under consistent pressure to reduce head count and improve earnings per employee.

"We are very comfortable with this, producing significant profits from our perspective, but from St George's perspective ,for number of staff it's not a massive profit generator."

With the acquisition, debtor finance will increase "To around 20 to 30 per cent of the sector, which is two times the size before the acquisition."

Total factoring and discounting turnover in the March 2007 quarter was $12 billion, a 21 per cent or $2.2 billion increase on the same quarter last year, with factoring turnover down 1 per cent to $758 million and discounting up 23 per cent to $11.2 billion.

In regards to why the invoice discounting arm was not purchased from St George, "It's a much larger exposure business, and has larger corporate borrowers."

The terms of the agreement are confidential, with final details expected to be released before the end of the financial year.