WHAT IS FACTORING?
A form of receivables purchase, in which sellers of goods and services sell their receivables (represented by outstanding invoices) at a discount to a finance provider (commonly known as the ‘factor’).
A key differentiator of factoring is that typically the finance provider becomes responsible for managing the debtor portfolio and collecting the payment of the underlying receivables.
The origins of factoring can be traced back to business dealings in England as early as the 1400’s. Around 1620, it was introduced to the Americas by the Pilgrims and grew as an effective means for companies to increase their cash flow.
what are the main drivers for factoring as a means of settlement?
- Sellers require payment as soon as possible …
- Buyers wish to delay payment as long as possible …
- The provision of flexible financing solutions can help alleviate any concerns on both sides.
- Normally, finance is provided for transactions payable on 30 or 60-day terms, but this can be extended to 90, or even 180 days.
- Funding can be provided as early as 24 hours after reaching an agreement with a finance provider (a “factor”).
- The amount of the advance can range from 70% to 90%, depending on the industry, credit history of the buyer and other criteria.
- Is to cover an underlying trade or services transaction.
- Often used to bridge the gap between invoicing and receipt of payment.
- Favourable financing and pricing terms can make a product or service more competitive.
- The factor will manage the process for the collection of funds from each buyer.
What type of industries we can assist with factoring services?
Factoring can be considered by a seller operating in any industry where goods or services are sold or provided on, mainly, 30 or 60-day terms; but other periods may be considered. The following are some of the more common industries for which companies will utilise factoring as a means of obtaining finance:
- Food services
- Staffing agencies
- Courier services
- Oilfield services
- Office supplies
What kind of services are offered by us?
Typically, one or more of the following:
- investigation of the creditworthiness of one or more buyers;
- removal of credit risk;
- collection and management of receivables;
- 100% protection against write-offs;
- invoice verification (i.e., to avoid fraud); and/or
- finance by way of immediate advances against outstanding receivables.
The services offered by a factor may allow a seller to offer preferential terms to buyers.
Although a factor will like to see a consistent and continuous flow of invoices, there is no general requirement that a seller must finance all its invoices.
Agreements between a factor and a seller will usually last for 6 months to a year. More competitive rates will often be offered for the longer the agreement lasts.
Recourse and non-recourse financing. The majority of receivables are handled on a recourse basis with the seller agreeing to buy back the receivable if the buyer does not pay on the due date. In this event, the seller must cover the cost of the invoice that is not paid. Non-recourse funding could be charged at anything from 1% above the fee set for recourse financing.