Suffering from slow-paying customers?

In a downturn, you will see banks tighten up and more people needing to turn to factoring companies to ease cash flow issues.

Is your company suffering from slow-paying customers? Are you experiencing cash flow problems as a result? There is an alternative to applying for loansor overdrafts. It's called factoring (or invoice discounting), selling your accounts receivable (outstanding invoices). Factoring companies buy accounts receivable at prices below their face value and then take on the responsibility of collecting the debts (80 to 100%). The factoring company’s client usually receives additional money from the factoring company after the factoring company collect the debts and after subtractind a percentage for their work. The amount of additional money factoring companies’ give back varies depending on the size of the debt and the administrative work necessary to collect the debt.

Companies that turning to factoring receive 80% to 90% for their outstanding accounts receivable on day one, giving them more frequent opportunities to take advantage of supplier discounts while taking on more customers without the obstacle of restrictive cash flow. This accelerates cash flow by not waiting 30/60 or 90 days for customers to pay.

A Factoring company charges a commission or fee for performing the credit and collection function for factoring and for purchasing the client's receivables with or without recourse to the client for bad-debt losses. The factoring commission (fee) for service usually ranges between 0.1% and 3% of factoring sales. A number of conditions will determine the costs for a factoring service such as;

The nature of the business, including styling considerations, seasonable aspects, stability of products, whether the customer is a manufacturer or wholesaler the factoring company looks at closely. Annual sales volume of client. As volume increases, the percentage charged will usually decline and the factoring would apply a siding scale. Average size of order processed. Large orders are no more time consuming to process than small orders and produce more revenue for the factoring company. Therefore, the factoring company’s commission rate may decline as the size of the individual orders rises. Average annual sales volume per customer. As this figure rises, there is less work and follow-up for the factoring company, since the client's business is becoming concentrated in few accounts. The factoring company commission rate will tend to decline. Credit worthiness of the client's customers. If the risk is relatively small, the factoring company’s commission may be lower. Client's selling terms. If they are long, the factoring company must wait to collect its receivables, this would require a higher fee. Other services such as billing, may be provided by the factoring company that will increase costs and raise the charge to the client. Additionally, the factoring company charges interest (fee) on funds provided. This borrowing is typical is charged a rate above the Bank of England base rate. During this downturn companies are turning to factoring because they do not qualify for loans or overdrafts as banking lending becomes more restrictive. Factoring companies' attention is more on the quality of your customer and their ability to pay. Factoring companies tend to look at the business future rather than historical balance sheets. The primary disadvantage of factoring is the loss of control with the factoring company running your sells ledger. Also, companies who sell invoices to factoring companies are exposing their debtors to dealings direct with factoring companies, who are concerned primarily with being paid, and not necessarily with maintaining a business relationship by accommodating late payers. However, the use of factoring may improved the relationship with the end customer if the client has been operating a lax credit management. 

With additional working capital, the businesses who utilize factoring realize greater supplier discounts, ability to enhance staff and payroll, potential to purchase equipment, increased inventory and improved credit ratings. Over all the management can start to unleash the businesses true potential.

Author: Toni Nicholson, factoringcompare.com, 10/08/2009