Is Factoring Meant For Me?

Your Business
Is your business growing? Do you need additional working capital to finance that growth? Then factoring could be the answer providing funds of up to 85% against the value of your trade debtors. Factoring is only available against trade debts.

Your Product
Not everybody’s product/services are suitable to factoring; the most suitable being the simplest or more straightforward type of product/service which can easily be shown to have been provided for example by a signed delivery note or timesheet. However factoring companies vary in the types of businesses they will factor.

Your Debtors
These should be trade debtors where goods/services have been provided under credit terms normally not exceeding 90 days. A factor will look at the quality and spread of the debtors before making an offer of a factoring facility. Equally important is your bad debt record, the ageing of the sales ledger and the overall collection performance.

Your Paper Trail
Factoring companies will be interested in your paper trail from the taking of an order to the delivery/provision of goods/services stipulated in that order. It is important that your record keeping is well maintained and that they can be easily followed through to the issue of an invoice and updating of the sales ledger.

Your Cashflow Requirements
Essentially you are looking at factoring specifically to improve your cash flow. Factoring can do this in two ways:

a) By providing cash in advance of your customer paying by offering an initial payment of up to 85% against invoices as they are issued by you.
b) By outsourcing the management of the sales ledger to the factor and thereby allowing them to improve your collection performance and reduce your debt turn.

Your Credit Control Requirements
In a fast expanding busy company there is not always time to implement and control good credit control procedures. So by outsourcing this to a the factoring company could make good business sense as the factor can provide you with a disciplined and regulated credit control procedure to the benefit of you and your business. Consideration should be given to how much you as the prime mover are spending in the chasing of slow-paying customers when your time could be better utilised growing your business.

Your Bad Debt Risk
Another facility offered by factoring companies is bad debt protection whereby they will give credit limits to your customers and should that customers business fail the factor will take the bad debt up to the limit set. This is referred to as non-recourse factoring.

To Sum Up

What are the main benefits to your business of factoring?

1) The provision of finance for growth.
2) The ability by you to take funding from the factor of the agreed initial payment percentage as and when you require the money.
3) Improved cash flow by releasing working capital to your business.
4) An opportunity to outsource the administration of your sales ledger including the chasing up of overdue accounts.
5) Improved credit control.
6) Bad Debt protection.
7) Improved working capital allows you to agree better terms with your suppliers.