To many of us factoring is something to do with maths and usually best ignored, especially by those who need all their fingers and toes to count something.
Yes, there are factors in maths but this is not what we are talking about here.
Factoring is actually one of the oldest forms of trade finance in the world. It is believed to have started in Mesopotamia, the cradle of civilisation, in about 1000BC. It was practised in England from about the 1400s and the Pilgrims introduced factoring to America in 1620. Quite a history.
So what is factoring?
It is a transaction in which a business, yours, sells its invoices (accounts receivable) to a third party financial company for a percentage of the invoice value. The financial company is called a “Factor.”
Why would you as a business sell your invoices?
Within 48 hours of issuing an invoice, the factor can deposit a percentage of the invoice value to your nominated bank account, with the agreed balance to be deposited when the invoice is paid. Voila, you have cash flow.
Qualifying for the “cash flow finance”, as it is also known, is based on your company’s turnover. Generally if your turnover is between $20,000 and $500,000 per month you qualify, even if you are a start-up company.
Bricks and mortar or assets are not required as security, as the verifiable invoice or receivables are the security and as your receivables grow, so does your facility with the Factor also grow.
Factors are not debt collection agencies and it is between the Factor and your company as to who would make the call to request payment, when invoices are overdue. Generally it is best if you, the company, continues to look after your debtors as you know your customers better than the Factor and it can eliminate “toing and froing” to verify a customer’s situation.
The Factor can provide information on the creditworthiness of prospective customers; maintain the history of payments by customers (i.e., accounts receivable ledger); and daily management reports on collections. To a certain extent it is “outsourcing the credit function”. It is also possible to login in the Factor’s website and access reporting information on your debtors.
Fees for the service will vary depending on your turnover, with the fees being set when your application is approved.
If invoices are not paid within an agreed period of time you would usually repurchase the invoice and pursue the debtor as normal, though it is recommended you stay on the right side of the law!
Factoring is also called “cash flow lending” and “invoice lending”, whatever the name, it is a very effective way to ensure cash flow to grow your company, purchase equipment, have a Christmas party……… and you are not the one sweating over late payments.
Not having to deal with a bank to increase your overdraft or apply for a loan is an added bonus and you would have to be happy about that.