Factoring

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion
Apart from 'Don't do it!!' is there any advise anyone can give me for doing the books for a client who's started using a factoring company? He's just let me know that he's done it so I don't know all the details yet, but I've not had to deal with this before so any hints & tips would be very welcome.

Thanks!

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Factoring

    Hi Jodie

    Whatever system you are using, you need to set up a control account for the factoring company.

    What happens is that the company will factor say £10K of invoices to the factoring company. Against this, the factoring company will advance £8K to the company before any debts have been collected. Debts are then collected as and when, and the cycle continues.

    Unless proper controls are set up at the beginning it is really difficult to work out what the balance on the factoring account really is - as they also automatically deduct their invoices from the rolling balance.

    I know this from bitter experience, having tried to sort out the books (on Sage) for a company who used factors.

    They went into liquidation...... need I say any more about factoring.

    A half way decent credit control system and a good voice on the phone would cost a fraction of the factoring fees - need I say more :evil:

    Claudia
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Factoring

    I have kept the books for a couple of clients using factors. It is hugely expensive, and some of the smaller factoring companies have some really bizarre reporting procedures.
    I found the easiest method in Sage was to use a bank account to control it.
    - Post customer receipts for all factored invoices
    - post a transfer to all monies drawn down
    - Post bank payments for interest and charges
    - reconcile to the factor statement

    Factors often don't bother to chase overdue accounts adequately, and if they do, there is a risk they upset the debtor and your client looses future business. In view of this, I would favour invoice discounting, where the business owner is responsbible for chasing overdue accounts, although the charges are still very high. Either way, the business owner is often obliged to factor all invoices which lines the pockets of the factor very nicley.

    I agree with Claudia - there is no substitute for a few good quality phone calls from someone who has a genuine interest in improving the client's cash flow.

    Is your client fully aware of the costs. I once had an otherwise intelligient and astute client tell me gleefully how much money he could raise very quickly - he didn't realise he would be charged interest on the lending!.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Factoring

    thanks for you advice :)

    the situation is that the client in question bought the business from a previous client of mine - he's got a very bad credit rating & can't get a loan from anywhere to pay for the business so factoring was basically the only way for him to raise money to pay off the original owner. It's a very complicated situation and there's been a lot of shouting going on between them, i'm staying out of it & just doing the books (until they stop paying me!)

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Factoring

    We've been factoring for almost a year now and the cost is astronomical for a small business like us, probably around £20k per year. This was forced upon us by our bank manager to sort out a serious cash flow situation and once hooked, it's very difficult to escape. We'd love to get out but can't and don't they know that. He also flogged us some nice but unwanted HSBC private medical schemes at the same time too. Nice bank manager taking advantage of our vulnerable situation...

    We have a separate bank account for this and just journal all the draw downs and charges when they are incurred. It's immensely hard to reconcile though if you let it slip for a while.

    Do they earn their money? Do they buggery, judging by the amount of time I spend monitoring and calling them to correct the most simple of errors on their ledgers or hassling them to chase the payment, thus freeing up the retained part. We've even had bizarre situations where a customers overdue amount is more than their total outstanding amount (due to unposted payments sitting on account) and legal letters have gone out. We can probably directly attribute losing several key customers thanks to them.

    Robert

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