Essentially, factoring is used when a sale is conducted on credit terms between a vendor and a buyer and financed by a third party called a FACTOR. Most invoices raised have extended credit terms of 30 or 40 days (or even longer in some businesses).
A company can either wait to pay until the due date, offer a discount to get the customer to pay early or finance the invoice. Each option has a cost. By waiting for the customer to pay, particularly if cash is tight, there is opportunity cost; a company loses the use of these funds during that period. By offering a discount, perhaps a per cent of the profit needs to be passed on. Still, you run a risk – the customer may take the discount but then take another 15-25 days to process and pay the invoice.
The option of financing the invoice also entails a cost – a factoring fee. However, you retain control of your debtors and receivables. You can decide which debtors to finance, and when. You are not reliant upon your customer's payment in order to meet your own obligations or to take advantage of sudden opportunities in the marketplace.
How does factoring work?
First, the factor (lender) determines if your business fits its profile. Once the credit of your debtor and the validity of the invoice have been verified, your receivables are analysed. After confirmation, the factor advances an agreed pre-payment (i.e., between 60-85 per cent) of the value of invoice. When your debtor makes the payment to the factoring company as agreed with you and your debtor, a factoring fee is deducted and the balance paid back to you.
- Ideal for young, fast-growing companies:
Factoring is custom-made for companies that are growing by leaps and bounds. Often, a new company grows so fast that it quickly outgrows a traditional line of credit. This makes it difficult for the company to seize market opportunities that will help it stay on its growth track. Using factoring, it is almost impossible to outgrow a credit line. With factoring, the line is based upon the amount of qualified receivables, and limited only by the factor's lending limit.
- A good way to ensure equity retention:
Factoring allows a company to finance without diluting equity. This is a critical issue for current shareholders.
- Taking advantage of supplier discounts:
A company can factor an invoice to take advantage of a suppler discount. Over time, this could amount to significant savings.
- Eliminating the need to pledge collateral:
Using factoring, you can often structure a facility that doesn't require any assets to be pledged as collateral. It analyses the strengths of your debtors and provides you with a facility against your receivables.
- Simplifies management of sales ledger and receivables:
You could have a close tab on the sales ledger and receivables using the online, real-time system of the factoring company, thereby reducing the requirement for more staff. This will also enable you to have access to more information and analysis.
- Eases collections:
Since the factoring company follows up on outstanding invoices of debtors, the burden of collection is eased. This creates more time for your marketing staff to sell and generate more volume for the business.
- A form of credit protection (non-recourse factoring):
Factoring enables you to pass off the credit risk. The factoring company will take on the risk of your debtor. In the event of a default by your debtor, you will not be called upon to pay up the debt like in the case of a traditional factoring transaction. This is referred to as non-recourse factoring.
Why choose Nations Factors?
- Nations Factors is the factoring arm of Nations Trust Bank.
- Availability of facilities in proportion to your sales.
- Up to 85 per cent of the invoice value paid immediately.
- Tangible security not required.
- Free connection to the most efficient state-of-the-art, online, real-time IT system.
- Collection from debtors by Nations Factors.
- No start-up fee.
- No exit fee.
How much does it cost?
A pre-agreed administration charge for the services we employ, i.e., managing your sales ledger, collection of your receivables, credit advisory service, etc.
An interest for the funds drawn against your invoices computed daily and debited to your account at the end of the month.