Factoring

[xcesiv]

Good morning all

My boss and I have been consulting with Finance Advisors and 1 suggestion has been Factoring.

although i have heard about it, I have never had any experience with Factoring.

Has anyone had experience with either a supplier Factoring or being the company that is factoring your business

I would like to hear some of the Pros and Cons of it from your experiences.

To me im a bit half half on the idea from what i have heard.

Can anyone please give me there insite

thank you

Warren

 

[pennyk]

Obviously the benefit is that all your invoices get paid quickly.
but you will pay through the nose for the privilege.
So, I guess you need to know what percentage of your invoices are outstanding past the due date. When I had a business, most of our big accounts were paid before we supplied the goods/ services. So, factoring didn't make sense.
The "sales pitch" the factoring companies use is that you can negotiate early payment discounts from your suppliers. But I'm not sure how often that works. The company that I work for now is not at all interested in early payment... only on-time payment. So, they won't provide any discounts for paying early. But smaller, family owned companies may be prepared to pay a discount for early payment. So, you also need to know whether your suppliers have cash flow problems.... and might be more open to the factoring approach.
you also need to think about your customers, and whether you are happy to "sell off" the contact with them over payments. I would prefer having my own staff following up payments, and following the ethics and relationship of our company, than having a heavy handed approach from a 3rd party who has no relationship with my customers.
I do think there is still a bit of a "dodgy" reputation in factoring..... people want to know why you can't get an overdraft to fund your business. To me, it feels like a more desperate move.
But I'm sure there are some people who use it effectively, and it provides a great cashflow stream for their business.
Pen

 

[Peter_Tersteeg]

Personally I'd prefer to review the business to ensure that it runs on the merits of its own cash flow, and look at strategies to ensure that the cash flow is regular and reliable.

Whilst there is a place for factoring, it can be a bit like using a payday loan to get from one pay packet to the next. It gets you the money you need now, but it comes at a high cost and it tends to move into a cycle of continuous use, never really getting ahead.

Also keep in mind that the finance adviser gets paid a commission on the factoring contract. Do they really understand the business, the balance sheets, the customers, the industry and the cash flow cycles?

A business coach I know suggested getting enough funds put aside to maintain the business for 3 months without any income. Once this goal is achieved, add another 10% to this slush fund every 3 months. If a business can achieve this, it'll never need to use factoring, it probably won't even need an overdraft.

Your boss may need to understand his business's cash flow cycles better. I can recommend an excellent business coach if you feel this would be beneficial.

There are also some alternatives to factoring, without the the need to on-sell customers contracts. It might be worth looking at some of these alternatives.

 

[Macca]

When I was in business, any company that needed to factor their accounts were seen to be a credit risk.

The other problem is that the factoring company is only interested in their money, not the ongoing relationship with the customer.

I believe by introducing a third party into the relationship you lose the personal rapport and understanding that can exist between businesses over time.

If doing the accounts and chasing the money is a "problem" for your boss, (and many don't like doing it) get a part time account person, there are many semi retired folk looking for a day or two a week. Call them "the accountant" and blame them when talking to the client about paying on time.

That what I used to do

 

[xcesiv]

I still cant see the benifits with Factoring. All of your comments are very similar to mine.

Our Cash flow is ok and budget is tight, and we have an overdraft/surplus funds in place to cover the tighter times.

I am the one chasing the Debts and has improved dramatically since i started here 2 years ago.

We have just had a few bad clients get out of control and then go bust

The industry we are in and the business type we run does not help.

The main reason I beleive the consultants wish to introduce factoring is for account and income security. If a client wants to trade with a large account, the factorer agrees to an account limit, and if the Factorer does not agree to an account limit then we do not offer an account.

I think there is a better way to do this?

What are your thoughts.

 

[boods99]

There is a mob over here in Perth that is advertising their services. One thing they mention right at the end of the ad, is that they do not act as a debt collector. Just wondering what happens if you use this service and your customer refuses to pay, who ends up taking the hit??

Boods

 

[pennyk]

The main reason I beleive the consultants wish to introduce factoring is for account and income security. If a client wants to trade with a large account, the factorer agrees to an account limit, and if the Factorer does not agree to an account limit then we do not offer an account.

I think there is a better way to do this?

What are your thoughts.

Are the consultants getting a commission from the factoring service?!!

If you have your debtors mostly under control, there is not much point doing factoring. It would probably be just as effective to do the credit checks yourselves, and decide upon a reasonable credit limit, than to get the factorer to do it.

Pen

 

[xcesiv]

The consultants are signed up under contract as to not take commisions from any external/recommended services.

Just to give u an example as of today our debtors look as follows

0-30 Days = 73.9%
31-60 Days = 18.1%
61+ Days = 8.0%

I think thats not to bad...

As mentioned before, Factoring is not a Debt Collection System. This is where i think the Factoring comes apart.

They are not a Debt collection service and are not interested in customer service.

I think we should be looking at someone that takes over our bad debts once they hit 40 days or something not the first 30-40 days. Then they chase the bad debt and take there fee

 

[Bargain Hunter]

When we had our own business one of our suppliers engaged a factoring company to chase their accounts, it was the worst move they could have made. The factoring company issued letters of demand while still within trading terms and the attitude they displayed when making a simple enquiry was not in the best interest of the supplier. We were one of their biggest clients and they quickly removed the factoring company from our dealings.

In this case the factoring company sure acted like a collection agency.

 

[xcesiv]

From what i understand they act like a collection agency, but do not take any of the risk.

Yes they give you the Cash in advance, but if they fail to receive the cash they take what they gave u back.

The way it looks to me is we still have all the risks.

only benifit is that they have stronger credit checks in place than we would.