Atlanta, GA -- (SBWIRE) -- 04/05/2011 -- The price a company pays for factoring its Receivables is dependent on a number of characteristics relating to the business entity itself and is also a reflection of the general level of risk attached to the Factoring Industry itself. It is a well-known adage that the greater the risk, the greater the reward, so let us review all the issues that impact the final rate any client will pay.
Unlike other industries, the funding of working capital by a Factoring company, precisely related to the generation of invoices by its clients to its customers, involves the provision of services that a client might or might not have performed, until this time, by itself. The essence of the factoring transaction is that the invoice generated by a client is sold (or assigned – take your pick), to the factor. As with any transaction of purchase and sale, the prudent purchaser will always perform due diligence to be assured of the worth of the asset being purchased. As such, the factor will assure itself that the asset being purchased (the invoice) is a real invoice representing goods or services actually sold by its client in response to an order from its customer.
This part, which essentially protects the factor, is ironically, one that is sometimes interpreted and used as a Customer Satisfaction call. How many times have I called a Client’s customer (called the Account Debtor in our industry), to verify an invoice only to be met with: “Wow, I am really impressed that you called to ensure that we are happy with our purchase. That’s great customer service!” to be followed by: “Oh, we need to buy some additional items. Can you take our order?”
Of course, the amount of administrative burden placed on the factor depends on the number of invoices being factored each month, the size of these invoices and the nature of the industry in which the client operates.
In addition to the performance of this due diligence, however, the factor also evaluates the Credit worthiness of the Account Debtor and sets appropriate credit lines. We have a team of experts whose sole function it is to review and monitor credit-worthiness so as to ensure that our clients do not make sales to account debtors who cannot pay within terms, or who cannot pay at all for the quantities being purchased. As I like to remind my clients: “A sale is not really a sale until the customer pays the invoice, until the cash is in the bank.” It is surely true to say that we have, over the years, saved our clients many losses from “Bad Debts” by restricting sales to businesses that are weak or failing.
Of course, all assets once purchased, need to be cared for. So, once purchased by the factor, the outstanding invoices are closely monitored to ensure that any overdue or delinquent invoices are followed up by some kind of Collection procedures. Sometimes Account Debtors complain to our clients that we are rude, unnecessarily harsh or demanding in our Collection calls to the extent that the Client/Debtor relationship is now seen to be under threat. It is facile to think that we are a bunch of hoodlums threatening delinquent debtors in aggressive tones as if we have the proverbial Guido in the wings waiting to destroy kneecaps! The fact is that experience over some 17 years of being in this industry has taught me that those debtors who react in this way are always the ones that will not or cannot pay as agreed, wish to further delay the time of payment or to find reason to withhold it completely and use the fact that we have called, as a Red Herring to justify their delinquent behavior. It is foolish to think that we are not similarly as mindful of the value of the relationship with the Account Debtor as the Client itself. It is trite to emphasize that our livelihood depends, as with our client, in maintaining cordial and professional relationships with all parties involved in the transaction. We are professionals and we behave that way!
Finally, we send out Statements of Account regularly to the Account Debtors listing all open invoices as of the Statement Date.
These serve as a reminder to the Account Debtor and also act as a catalyst when the Debtor sees an invoice listed that is not recorded in its ledger. The first call is to us for copies of these invoices.
It is clear from the above that we provide many ancillary services to the actual working capital that we fund. These services are performed efficiently and professionally and do relieve the client of having to perform them itself. This represents a reduction in overhead cost to the client, or allows the reallocation of human resources to the core business rather than to the business of collections.
The other issue to which I referred earlier, the risk attached to the Factoring Industry itself, is one I mention with much regret.
Sadly, it is a fair comment that a great deal of the losses that Factors suffer result more from acts of Fraud perpetrated upon them by the very companies they are trying to help, their clients, than from actual credit losses or bad debts. Thus, the factor is constantly on guard to identify possible breaches in the internal controls in place so as to be aware of possible fraudulent practices. Nonetheless, when it comes to fraud, there is always a way…
So, the cost of Factoring is a price resulting from an amalgam of all the characteristics described, however intangible some of them might be. Then, of course, the respective negotiating skills of the parties involved, the enthusiasm with which a factor views a prospective client are all factors that contribute to the final rate charged to the client. We do operate in a fair market, so competition does keep us on our toes. Is Factoring more expensive than Bank finance? Yes. More expensive than Venture Capital Finance? No.
In the final analysis, in a Capitalist environment, the final price is the one which a willing seller and a willing buyer both agree to. In a comparative analysis, there are always things that cost more or less than the one being evaluated. What settles the debate as to whether factoring is expensive or not, is whether it is used or not, whether factoring companies profit and their clients benefit. There are many factoring companies around. I guess we have not yet priced ourselves out of the Financial markets!
http://www.aberdeenfunding.com jfreedberg@aberdeenfunding.com