Factoring Articles

The Safety of Debtor Factoring for SMEs

Today, given the global economy, there are more companies using debtor factoring as an integral part of doing business than ever before – so this question has seldom surfaced...Is debtor factoring really safe for you?

Debtor Factoringis done by exchanging one form of an asset, usually future collectable invoices into another form of asset, normally current cash of the invoice at a discounted rate. So, debtor factoring protects a company from future uncertainty and provides funds for its smooth operation.

One seldom asked question is does debtor factoring cost a lot? When talking about the cost of factoring, the terms agreed between your company and the factoring company is what makes up the cost.

Additionally, there are several types of factoring, the first one is “with recourse” and the second is “no recourse.” Most factoring companies are more inclined to agree with recourse factoring, due to the fact that the risk of customer default will be shared between you and the factoring services company. If the factoring company is responsible for a small amount of risk, the factoring costs will also be proportionately small. If you have loyal customers and you’re positive and confident that they will pay back the receivables, then an agreement with recourse is probably the best course of action to take.

An agreement with no recourse is where the factoring company carries all the risks involved. In this scenario, you have transferred all of your risks to the factors. This type of agreement is appropriate when you are in doubt about the paying capability of a customer.

The factoring companies without a doubt knows this fact, as they will also perform a detailed due diligence for each customer. Should the assessment hints that there is still a good chance of payment, the factoring company would agree to the no recourse agreement. In such cases, they will charge a higher discount rate and that translate to a higher cost for you because of the risk that is still carried by the factoring company.

Many people ask, what about the fees? Does debtor factoring involve a fee? As with any other financial business, factors do charge fees. Conditions where fees are applicable can be read in the factoring contract’s legal terms.

Keep in mind that some factoring companies usually impose a minimum number of receivables to be processed each month, and the exact number will vary according to your business sales. There are others however, like The Interface Financial Group (IFG) who also offer single invoice factoring where a customer can factor one invoice at a time. Speak with a specialist at IFG who will explain selective debtor factoring or “spot factoring” where there is no contract or minimum quantities or costs.

A legal agreement should always be reviewed by a lawyer, as they understand legal contract better than you do. Lawyers can be asked to review the factoring contract for a fee. Think of it as safety fee, ensuring the contract is not hurting your business.

Last, you need to determine if debtor factoring is for you? Debtor factoring will provide great benefits for your company as long as all of the conditions favours your company's growth.

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