By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Jamaican-headquartered investment house is spearheading a multi-million dollar accounts factoring proposal that could be “a great tool” for Bahamian small businesses if structured properly.

IDB Invest, the Inter-American Development Bank’s (IDB) private sector arm, is due to decide next week whether it will extend $10m in “working capital” to Sygnus Group’s local subsidiary to finance the acquisition of accounts receivables owed to Bahamian small and medium-sized enterprises (SMEs).

Through acquiring these assets, which represent unpaid monies owed to Bahamian SMEs by their clients, the proposal aims to boost these companies’ liquidity and cash flow by freeing their balance sheets from these debts. And, by converting these intangible assets into cash, this nation’s small businesses will be better able to focus on, and invest in, expanding their operations.

Gregory Hines, who is named by IDB Invest as the Sygnus Group’s contact for the accounts factoring initiative, could not be contacted by phone and he did not respond to a Tribune Business e-mail containing detailed questions before press time last night. 

However, Mark A Turnquest, founder of the 242 Small Business Association and Resource Centre, and a well-known Bahamian consultant to the sector, told this newspaper that the few details released by IDB Invest suggest the scheme could be “a great financial management strategy” for SMEs who comprise between 90-95 percent of the economy’s active businesses.

But, to achieve this, he warned that it was imperative that the proposal be structured and managed correctly. Given that an organised accounts factoring scheme has never been implemented in The Bahamas before, Mr Turnquest suggested that the ‘factoring’ party - the entity that purchases the accounts receivables - may have difficulty collecting on them and encounter “trust” issues in trying to do so.

The 242 Small Business Association and Resource Centre founder added that the relative novelty, from a Bahamian perspective, of companies selling their accounts receivables to a third-party meant proper education and information transparency will be vital to the proposal’s success since it is key that “everyone has to be on the same page”.

IDB Invest, confirming that the financing proposal is due to go before its Board next Tuesday, July 15, for approval, indicated that the accounts receivables initially targeted for acquisition will be those owed to SMEs by the Government of The Bahamas. And it suggested that the plan will “deepen” the Bahamian capital markets by providing “new securities” to SMEs, although no specifics were offered.

“We are considering a $10 working capital line to Sygnus Investment Bahamas with a five‑year tenor to finance small and medium-sized enterprise (SME) receivables in The Bahamas,” IDB Invest said. “The loan will be 100 percent guaranteed by Sygnus Credit Investments.

“Initially, the obligator will be the Government of The Bahamas, but they plan to gradually onboard stable blue chip private sector companies.” That appears to signal that the accounts factoring scheme will be expanded beyond receivables owed to SMEs by the Government to also include those due from major private sector entities.

“This solution is anticipated to provide liquidity to SMEs in The Bahamas by purchasing short-term receivables with maturities ranging from three months to less than a year. Additionally, this working capital line will deepen the local capital market by introducing new securities that offer liquidity to SMEs without them incurring additional debt,” IDB Invest added.

“IDB Invest will be providing funding as well as support to Sygnus in offering this flexible financing solution that traditional banks may be reluctant to support.” Other IDB documents said Sygnus Credit Investments for this initiative is targeting companies with annual turnover ranging from $5m to $35m, with the loan financing used to purchase receivables maturing in as little as one year.

The average loan was pegged at $2.5m, with 45 percent of the targeted companies involved in the financial and construction sectors. Adding in infrastructure and telecommunications operators grows the latter figure to 64.8 percent, or almost two-thirds of participants.

“Sygnus Credit Investments defines SMEs as enterprises with annual revenues ranging from $5m to $35m. The sub-loans granted to purchase receivables from SMEs will be short-term, with maturities up to 12 months and an average amount of $2.5m,” IDB Invest said. “The four most representative sectors in the portfolio are financial (23.4 percent), construction (21.6 percent), infrastructure (10.9 percent) and telecommunications services (8.9 percent).”

Mr Turnquest yesterday reiterated that accounts factoring, while not widely practiced in a structured way in The Bahamas, has been commonly employed in developed countries and many other markets for decades.

“It is very important that this financial strategy take place,” he told Tribune Business. “However, the challenge is the difficulty of collection, which will be a problem. The familiarity between the company and its customer might be different as a result of the factoring transfer process to another business or credit facility.

“There might not be a good communication process and be more breaking down of cash flow streams.” Mr Turnquest said that, as a result of selling its accounts receivables, the original product or service provider will no longer have to deal with the client that owes the debt.

Instead, the latter will have to deal with an unknown third-party that has acquired the rights to these receivables. And this could lead to unexpected stresses and strains, as that third-party may be less tolerant of delays or payment plan requests, and could demand its monies instantly.

“It’s a good strategy once you can guarantee the receivables are going to be fully honoured,” Mr Turnquest said. “It’s good on paper and a good strategy. However, the problem is how secure will it be? The worst thing to do is you get receivables from a business or financial institution valued at, say, $50,000 and find - at most - you can collect $30,000. That means someone is in the hole.

“It’s a great strategy, but could cause issues of trust between the [debtor] and next business. Tolerance has got to be high. You may have a strong relationship with the client, having known them for a long time, but the next business - the factoring third-party - may not know the person at all. They may have a low tolerance level, and only call them once before they get angry.

“It’s great. This is a great financial management strategy, and it could relieve the burden of the debt owed to SMEs once the programme is run properly because the challenge is that the Government normally takes a long time to pay SMEs, and small businesses have a lot of other challenges with different people owing them also,” he added.

“It’s got to be run properly, and there’s got to be more collaboration and information sharing in order for the process to run smoothly. It’s very helpful for the strategic development of small businesses in the country, but there’s got to be more information and Town Hall meetings between businesses, the Government so everyone can understand it.

“Everyone has to be on the same page because this has not taken place in this country at this magnitude. Everyone has to be fully educated to understand the rules... I fully endorse it. This is ideal, and a great tool to free up cash flow so SME’s can focus on operational efficiency and effectiveness.”

Sygnus Capital, which has ambitions to be a pan-Caribbean operator and is targeting US$1bn in “alternative assets under management” by 2026-2027, already has interests in The Bahamas and the accounts receivables factoring initiative is effectively an expansion on those.

Besides the $25m in financing its has provided to Bahamas Striping Group of Companies’ subsidiary, Caribbean Pavement Solutions, for its road projects in Exuma, Sygnus also previously raised $9m for the completion of the Government administrative complex in Eight Mile Rock, Grand Bahama. That took its total Bahamas exposure to some $34m.