Factoring

What is factoring?

As a factor:

Factoring is the purchase of invoices from a client.

As a client:

Factoring is the sale of invoices to a factor.

 

Services provided by the factor

Factor provides the following services:

1. Advance

2. Credit protection

3. Collection & receivable management

 

Advance

Factor normally advances up to 90% of the invoice value. For client which credit standing is good, the factor may advance up to 100% of the invoice value.

The 10% is known as a reserve.

It is a common misunderstanding that the factor will keep the balance of the 10%. This is not the case.

When the factor receives the payment from the debtor, the balance of the 10%(reserve) will be refunded to the client after deducting discount charge, service fee and other deductions by the debtor.

The reserve

Factor keeps reserve ranging from 10% and  20% of the invoice value. In some cases it could be more than 20%. The percentage of reserve is determined by the following factors:

1. The dilution i.e how much credit notes or deduction the debtors are likely to make.

2. The credit standing of the debtors

3. Performance risk of client

4. The factoring charges

 

Credit protection

In non recourse risk, the factor takes over the credit risk of the debtor. In the event the debtor fails to pay due the the debtor financial difficulties, the factor will pay up to the approved percentage of  invoice value or the debtor credit limit set by the factor whichever is lower.

The approved percentage of cover could be 100% or 90% of  invoice value.

Note that the factor only covers the credit risk and not the dispute risk. Should there be a dispute, the factor will not cover the risk and they will have recourse to the client.

 

Collection and receivable management

Most factors provide collection and receivable management services. These services are very useful for the small business which does  not have the means nor the resources to set up such functions.

The factor provides the following services :

1. Sending of statement of account to debtor

2. Sending reminder

3. Collection calls on overdue debts as well as to verify the accuracy of the invoices and payments

4. Provision of management reports such as ageing, sale analysis etc.