|
What is factor receivables? Factor receivables works as follows: The factor fully manages your sales ledger and provides you with credit control and collection services of all your outstanding debts. The invoices you issue upon a sale are sent to the factor who typically advances up to 80 to 90% of the invoice amount to you. The balance, less charges, is paid when the customer makes payment directly to the factor. The service is disclosed to your customer who typically receives a letter from the factor, or attached note to your invoice, containing payment instructions to the factor. Funds are typically released to you within 24 hours of issuing the invoice. There are typically two costs involved: a service charge expressed as a percentage of sales factored and an interest charge for the cash advances. The service charge, covering sales ledger management, collections services and, if you wish, bad debt protection can range between 0.60% and 3.0% of turnover. The main considerations in determining the service charge are your annual turnover, number of invoices and number of customers. The interest charges calculated on the daily usage of funds is typically comparable to normal secured bank overdraft rates. When the risk of bad debts remains with you the service is referred to as recourse factoring. Non-recourse factoring protects you against customers who fail to pay. The factor typically covers this risk by taking out credit insurance. The cost of the credit insurance is passed on to you and depends on the risk profile of your customers and the amount you factor, typically between 0.3% and 0.7% of turnover. You also agree on coverage limits with the factor, normally 80-95% of the factored amount. Many factoring companies provide Internet access to your account, allowing you to constantly monitor your sales ledger and individual customer details. Paper can be eliminated by electronic transfer of your invoices from your PC to the factor. Getting the proper factor receivables company which will work with you as a "partner" instead of a ccompany is vital to you getting the most out of factoring for your company. What kind of Company factors receivables? Any company that deals with businesses and generates invoices that needs to grow but can't because of cash flosw restrictions. Maybe the company has grown up in a town and is now larger than the little bank that made them their first loan. Maybe the credit of the principals wont allow them to get any type of competitive financing, or traditional "collateral" is already been maxed out" How to chose a factor receivables company * Trial period. Some factoring companies have a trial period when you begin using their services: "if you don't like it", you can end the contract after the first few months. Termination is always subject to full repayment of the funds. * Reputation and references. The factoring company will be a critical interface with your customers. Make no compromises. Work with a reputable firm to eliminate all risk of negatively influencing your customer relationship. Ask for references. Check if the factoring company is a member of the Factors and Discounters Association. * Personalized service. Particularly if you are a small company, make sure to have a customer service team available for you. * Exports factoring capability. If you export make sure the factor has its own network, or affiliate partners, in your customer's country to provide on the spot collection. * Bad debt protection. Some factor receivables companies offer this additional service, some don't. Ask! * Chose the factoring company according to your customer profile. Whether your customers are other businesses, or individuals is an important criteria in choosing your factoring company. * Transfer restrictions of your outstanding invoices. Make sure there are no existing contractual arrangements disallowing the transfer of your outstanding invoices to a factoring company. For example a loan that is secured by your outstanding invoices. * Information requirements to open an account with a factor. The factoring company will ask you to fill in an application form and provide additional documents and accounting statements you would also typically give to your your bank when taking out a loan. Be prepared to give a detailed overview of your customers, and if you request bad debt protection, their risk profile. Use this information and you will get the best from your factoring arrangements. We can help you get in touch with the correct factoring company for your needs.
|