But how did China's businesses and corporations grow so fast?
And what can Malaysian companies learn from them?
Much has been written on this topic, and the common answers are:
A large domestic market
Government support and protection
A cheap labour pool (although that is increasingly diminishing)
Exchange rate controls
Government infrastructure spending
While all these have played a major role on a macro level, we want to examine one factor that has played a major role on a micro, company-level and that has been largely ignored.
This relatively unmentioned factor is the "Financing Factor".
The China Business Financing Market is Advanced
One of the things the China government recognised early, is the fact that, for China businesses to grow to world-class corporations...they need financing!
Therefore, one of the key things that the Chinese government has ensured is that China businesses have access to not only cheap money, but also to some of the most advanced financial instruments of the West.
As you know, the #1 issue that plagues rapidly-growing companies is cash flow.
Various financial instruments, such as easy access to loans and other business instruments are widely available in China.
For instance, one of the key instruments they use is 'invoice factoring'.
Invoice factoring allows your business to get money from your invoices within days of issuing your invoice.
This ensures that your company is liquid and can continue to expand; you no longer have to wait 60,90 or 120 days to get your money. And in the meantime suffer from insufficient cash flow to grow your businesses.
Invoice factoring resolves this problem since you get your invoice paid upfront, you can plan and expand your business without waiting for your big customers to pay you.
In addition, you have suppliers to pay too right?
With a factoring facility, you can ensure all your suppliers are paid on time. This will increase your suppliers'confidence in you, which in turn can increase your credit line.
You no longer have to hide from and get stressed about collection calls from suppliers!
China's regulatory bodies realised the importance of this, particularly since many of its companies are engaged in the export trade and have to wait months in some cases to get paid.
In fact, in recent years China has issued over 1,000 factoring licenses, so it's easy for China businesses to get access to such capital. This ensures China businesses are flushed with cash flow to continue their expansion.
Conversely, in Malaysia, invoice factoring companies are lagging way behind...with only a handful of companies licensed.
And yet, this is not an oversight by the Malaysian government, as adoption of invoice factoring among Malaysian companies lags way behind that of China and the West.
Here's how Malaysia compares with China according to Factors Chain International.
As you can see, the factoring volume between China and Malaysia is huge...China's factoring volume is over 1,000 times larger than that of Malaysia's!
Why is Malaysia Lagging Badly?
Here's why Malaysian companies are lagging so badly, and perhaps gives an insight as to why Malaysian companies' growth rates are also lagging.
a) Wrong perception of factoring: most companies are not educated, nor are they aware of what factoring can do for their business.
b) Don't want to pay fees/interest: in many cases, factoring benefits and its flexibility can far outweigh the cost.
c) Unrealistic rate expectations: expect to pay the same rates as with the bank overdrafts. But don't consider the difficulty and inflexibility of bank as a cost to their business. More on this later...
d) Don't see the value of good supplier relations: adversely affecting trust and supplier quality, which also has a negative impact down the supply chain
e) Less factoring companies available in Malaysia
Why Invoice Factoring and not Just a Bank Overdraft ?
Firstly, most businesses will find it hard to get a bank overdraft in our current economic climate.
Currently, banks are wary of lending out money and have tightened the purse strings...ironically just when businesses need financing the most.
And even if you are lucky enough to have bank overdraft, you know for a fact that the banks can change the terms and conditions of your loan at any time. This create a lot of uncertainty and stress in planning for your business growth.
So How Can Factoring Work For You?
Firstly, you can smoothen out your cash flow by getting paid within a few days of your invoice getting issued, rather than 60 or 90 days.
This help resolve many of your cash flow issues and headaches.
Secondly, there's a lot of flexibility and certainty. You can choose which invoices to factor and which ones not to.
And you'll know how much your factoring limit is at.
Thirdly, getting a factoring facility is infinitely easier than applying for bank overdraft or loan.There's no need to mortgage your assets and you don't need to fill out tons of paperwork. In fact, in most cases, we can approve your factoring facility within a week.
Fourthly, you can maintain good relationships with your suppliers with a 'Reverse Factoring' facility.
If you have multiple suppliers who issue you big invoices regularly, you can apply for a reverse factoring facility whereby your suppliers can get paid within a day or two of issuing their invoice.
Therefore, you maintain excellent relations with your suppliers and make sure they don't go out of business (which could also negatively impact yours).
If you are serious about growing your business and smoothening your business cash flow like many fast growing companies in China, you need to consider factoring as a financial instrument.
To discover how you can apply for a factoring facility or if you'd simply like to know more, click on the button below to talk to one of our consultants today.
You'll be glad you did...it could transform your business and your life.