FULL FACTORING:
DISPELLING THE MYTH OF “LENDERS LAST RESORT”
Cash: a commodity in increasingly short supply in today’s economy. While consumers and businesses alike are “tightening their belts”, more and more small and medium sized enterprises are finding themselves chasing their debtors to ensure a sustainable cash flow – often to no avail. The Debtor Finance Committee of the Banking Association maintains it’s time to dispel the misperceptions that continue to surround full factoring – and for businesses to start using it as the powerful financial tool it is.
Gone are the days of factoring houses being “lenders of the last resort”. With different types of factoring increasingly being used by larger, more established companies as a means to maintain cash flow and boost growth, smaller and mid-sized businesses would do well to investigate this extremely powerful alternative form of finance. In so doing, many will be surprised to discover that full factoring in particular isn’t synonymous with losing control of one’s debtors’ book, and that disclosure need not have a negative impact on one’s business partners.
For the uninitiated, full factoring involves the purchase of an invoice from a supplier by a financier, with mandatory disclosure to the debtor. What this means in practice for a smaller business struggling to maintain its cash flow, is that if you have a healthy debtors’ book that holds the names of reputable companies, it is possible to “sell” these debts to a bank or third party financier. In this way, one gets instant access to the money owed to one’s business, with the bank/third party collecting the debt directly from your debtor. In terms of the mandatory disclosure, when collecting the debt, the bank will inform your debtor that they have “bought” the invoice from your company.
Contrary to popular belief, disclosure that an invoice is factored does not imply that one’s business is in trouble. What we’re seeing more and more in the market place is that larger debtors and government departments are only too happy to deal with banks and reputable factoring houses as opposed to smaller enterprises. This is because, when compared with some smaller start-up companies, banks and factoring houses typically have the requisite accounting systems and processes already in place to facilitate payment – in many instances having dealt with these debtors before. They know how they want their statements prepared, for example, and can provide them in the required format. They also have staff dedicated to facilitating the process: a luxury most small and medium-sized businesses can’t always afford. Needless to say, full factoring can therefore make debt collection a comparatively painless process for all parties concerned.
Another misconception that often prevents companies from seeing full factoring as a finance tool is that it requires giving up control of one’s debtors’ book. This is not the case at all. Full factoring merely involves the administration of one’s debts. This means the bank or factoring house will initially contact the debtor to inform them that the debt has been factored, and to set up the necessary accounting and payment processes. Once these have been initiated, this relationship will merely be appropriately maintained. It will not influence your business relationship with the debtor in any way. In this way, you still contract with the debtor regarding price, discounts, delivery and so forth.
Perhaps the most important element of full factoring that smaller businesses have yet to become aware of, however, is that it essentially looks past one’s balance sheet to one’s debtors’ book. This makes it an extremely attractive option when one’s balance sheet perhaps isn’t healthy enough to request a bank loan. In the case of full factoring, if you can demonstrate that reputable debtors owe you money, there is a good chance that you will qualify for full factoring – despite lacking in the balance sheet department. In this way, full factoring allows you to address the issue of your balance sheet while growing your business.
When it comes to finance options for companies throughout South Africa then, with credit options that are much more rigid and interest rates tempering potential growth, this would seem the opportune time to investigate the many factoring options available. In the realm of smaller and mid-sized companies particularly, owners and entrepreneurs would do well to look beyond traditional sources of finance and investigate full factoring. They’re sure to discover a finance tool that not only empowers their business, but facilitates growth and sustains cash flow in the process.
Johnny Philippou CA(SA), BCom, FCMA, is one of the founding members of the Debtor Finance Committee of the Banking Association and CEO of Merchant Factors which is part of the Rand Merchant Bank Group.
