There are times during the life of a business when owners hit a brick wall that prevents them from carrying out their business and potentially restricts the speed at which the business can grow. Have you ever come across a client who says: "We'll be happy to do business with you. However, we will pay in 30 (or 60 or 90) days." This can be a problem because the company must deliver its products on time but has to wait 30 to 90 days for payment.
As a result, a business can have a lot of money tied up in unpaid invoices. When the business is bogged down with unpaid invoices rather than cash at the bank, it cannot supply new products until the old products are paid for. These debtors are an asset because they can be turned into imminent funds. But the reality is that businesses rarely find funding against unpaid invoices despite their being "almost cash".
A solution to this is factoring.
Factoring is a financing tool that allows you to get your invoices paid promptly, providing your company with the necessary capital to operate the business, pay suppliers and grow. However, factoring is not a business loan. Rather it is the selling of your invoices at a discount in return for immediate cash. The factoring company waits to get paid, while you get use of immediate funds. Factoring can be easily integrated to any business and works as follows:
• You deliver your goods or services and invoice for them.
• You sell the invoice to the factor. They give you an installment of 80 per cent of your invoice. This is known as the advance.
• You get immediate funds to run your business.
Once the buyer pays the factoring company, you get the second installment (20 per cent) and are charged a small fee for the transaction. This is known as the rebate.
There are several examples of services a company can receive from a factoring company. The most prominent include factoring with recourse, invoice discounting and debt collection.
Factoring with recourse: This facility involves the factor purchasing the invoice, administering it and collecting, with the client remaining responsible for bad debt losses.
Factoring without recourse: This is where the factor assumes the responsibility for bad debt losses while administrating the sales ledger and collecting.
Invoice discounting: This is similar to the above. Invoice discounting entails a factor purchasing invoices from a company and advancing funds against those invoices. However, no notification is sent to the buyer of this agreement.
Debt collection: This is factoring with zero finance. This service involves the factor taking control of the debt collection of a company's debtors list or just a few debtors on the list.
The cost of the service depends on the type of services offered. It falls mainly into two categories:
A factoring fee: Calculated as the percentage on the amount of assigned sales, usually varies between 0.5 per cent and 3 per cent. The fee depends on various aspects including: the financial standing of the company; the quality and ability of its debtors to pay on time; the percentage of prepayment; the period of credit given to debtors; and the type of facility required by client.
Interest charge: This can be compared to a traditional bank overdraft. The interest charged is the Central Bank intervention interest rate plus a margin. This is calculated on the debit balance of the client current account with the factor. As customers pay invoices due, the interest charge will fall.
The essential point to be realised by both a company and factor is that factoring cannot be used as a financial line of last resort but only as a management tool to assist in attaining desired objectives. A company can recognise a requirement for factoring services, either in a financial or administrative aspect, within the context of an overall plan for future development.
Budgets for future development must include use and availability of financial and management resources, and will be analysed accordingly, so that management can see whether internal, and internally-generated, resources will be sufficient and whether factoring can assist to make more productive use of such resources.
Mr Magro is the factoring manager for PDK Financial Services, which offers factoring services as well as other financial services.
factors@pdk.com.mt
As a result, a business can have a lot of money tied up in unpaid invoices. When the business is bogged down with unpaid invoices rather than cash at the bank, it cannot supply new products until the old products are paid for. These debtors are an asset because they can be turned into imminent funds. But the reality is that businesses rarely find funding against unpaid invoices despite their being "almost cash".
A solution to this is factoring.
Factoring is a financing tool that allows you to get your invoices paid promptly, providing your company with the necessary capital to operate the business, pay suppliers and grow. However, factoring is not a business loan. Rather it is the selling of your invoices at a discount in return for immediate cash. The factoring company waits to get paid, while you get use of immediate funds. Factoring can be easily integrated to any business and works as follows:
• You deliver your goods or services and invoice for them.
• You sell the invoice to the factor. They give you an installment of 80 per cent of your invoice. This is known as the advance.
• You get immediate funds to run your business.
Once the buyer pays the factoring company, you get the second installment (20 per cent) and are charged a small fee for the transaction. This is known as the rebate.
There are several examples of services a company can receive from a factoring company. The most prominent include factoring with recourse, invoice discounting and debt collection.
Factoring with recourse: This facility involves the factor purchasing the invoice, administering it and collecting, with the client remaining responsible for bad debt losses.
Factoring without recourse: This is where the factor assumes the responsibility for bad debt losses while administrating the sales ledger and collecting.
Invoice discounting: This is similar to the above. Invoice discounting entails a factor purchasing invoices from a company and advancing funds against those invoices. However, no notification is sent to the buyer of this agreement.
Debt collection: This is factoring with zero finance. This service involves the factor taking control of the debt collection of a company's debtors list or just a few debtors on the list.
The cost of the service depends on the type of services offered. It falls mainly into two categories:
A factoring fee: Calculated as the percentage on the amount of assigned sales, usually varies between 0.5 per cent and 3 per cent. The fee depends on various aspects including: the financial standing of the company; the quality and ability of its debtors to pay on time; the percentage of prepayment; the period of credit given to debtors; and the type of facility required by client.
Interest charge: This can be compared to a traditional bank overdraft. The interest charged is the Central Bank intervention interest rate plus a margin. This is calculated on the debit balance of the client current account with the factor. As customers pay invoices due, the interest charge will fall.
The essential point to be realised by both a company and factor is that factoring cannot be used as a financial line of last resort but only as a management tool to assist in attaining desired objectives. A company can recognise a requirement for factoring services, either in a financial or administrative aspect, within the context of an overall plan for future development.
Budgets for future development must include use and availability of financial and management resources, and will be analysed accordingly, so that management can see whether internal, and internally-generated, resources will be sufficient and whether factoring can assist to make more productive use of such resources.
Mr Magro is the factoring manager for PDK Financial Services, which offers factoring services as well as other financial services.
factors@pdk.com.mt