cmcc

wolfe

hey everyone! i have a question .whats the deal with factors.. factoring of debt? would someone be so kind to explain it to me? really wish there was a text for this unit.
thanks in advance.

wolfe

forgot one thing. whats the difference between factoring of debt and invoice discounting?

blobbyh

Factoring is where you effectively sell overall control of your debtors ledger to someone else, for example a bank such as HSBC. Every single sales invoice you raise, you send to them on a regular basis and they upfront (loan) you up to 80-90% of the invoice value, available immediately rather than you having to wait weeks or months for the debtor to pay. They collect the whole amount on your behalf with the remaining 10-20% passed to once the debt has been paid within normal time frames. They also chase the debts for you (and may harrass your customers) since you've effectively handed over control of your debtors ledger lock, stock and barrel. You are also landed with three charges. They charge a percentage of each invoice value, say 2%. They also charge a lending fee for the drawdown (was up to 13% when I did it) plus a transfer charge of up to £10 daily if you need immediate liquidity (as is often the case).

Invoice discounting is similar but you retain control of the chasing of the debts. This is slightly cheaper than full on factoring but you have to demonstrate to the factorer that you have an effective credit collection system before they'll lend to you.

Both are often forced onto small, cash weak companies by banks who may be concerned about the company's overdraft. It's a quick fix in the short term due to the huge cash injection at the beginning but long term is often a death knell to those who've adopted it as the banks make fortunes once their hefty charges soon rack up. It's also open to abuse as pre-invoicing - strictly against the rules - often becomes a temptation, especially when cashflow hits critical levels. This is then offset by credit notes if/when the banks chase the debt only to realise it's been "accidentally" invoiced and a strange kind of stand-off between factorer-factored may ensue.

Many (now including myself) see it as unethical bank exploitation and something to be avoided at all costs.

SandyHood

The practical use of factoring describes very many different agreements between a factor
I took this from the website
http://www.abfa.org.uk/public/factoring.asp

A Factor agrees to-

1. Pay an agreed percentage of approved debts as soon as debts are notified. The percentage depends upon a variety of factors, but 80/85% is common. The balance, less charges, is paid when customers pay. This flexible finance keeps pace with business growth, without parting with control or equity.
2. Undertake all credit management and collections work, following an agreed credit policy to ensure faster customer payments without loss of goodwill.

And then the bit to encourage you to use them
The savings in administration are substantial, and faster customer payments mean a reduced term of borrowing, resulting in lower interest costs.

Invoice discounting

1. Immediate cash is available up to 80/85% of approved invoices.
2. Responsibility for the sales ledger operation remains with you, and the service is normally undisclosed to customers.
3. Payments that you receive are paid into a bank account administered by the Invoice Discounter, after which you are credited with the balance, less charges.

SandyHood

sorry blobbyh
I started and broke off before I submitted, so I didn't know you'd already answered.

blobbyh

No problems Sandy, I think we pretty much covered it between us.

Though my final thought would be that if companies had adopted efficient credit management systems in the first place (I inherited mine), they may not have ended up being forced down the factoring route. A warning to others who may end up in industry/service sectors without thinking good CMCC techniques are important.

wolfe

thank you so sooo much sandy and blobbyh! brillian explanations!!

katsutlieff

Am currently looking at this for CMCC, and have glazed over slightly

Blobbyh and Sandy great explanations thank you

Sometimes forget about the search facility