IS FACTORING ASKING FOR CREDIT? OR A GROWTH STRATEGY? (November 20, 2015)

Many people believe that factoring is a credit facility. It actually isn’t when you factor your invoices, you’re in fact cashing up an asset because that’s exactly what your invoice is, an asset.

Interface Financial NZ’s Gary Wong points out that factoring does not add to a company’s debt. Essentially, Interface is purchasing an asset, which are your unpaid invoices. The key here is the credit worthiness of your customer. Basically it’s cash upfront for unpaid invoices.

Some SMEs are a bit hesitant about factoring’ because it’s done on a disclosed basis the customer is advised that the invoice has been sold to the factoring company and they worry that having this funding facility might be perceived as a sign of weakness but funding is an critical part of being in business and factoring is just one more product (one that’s been around for hundreds of years).

Everybody understands that companies, particularly those that are growing, need funding they need good cash flow and factoring is a good cash flow tool; it’s a growth strategy’ and when you view it as that, then the benefits are obvious to all parties.

Encyclopaedia Britannica defines factoring as the selling of accounts receivable on a contract basis by the business holding them’.

Factoring differs from borrowing in that the accounts receivable are actually sold rather than merely offered as loan collateral.

Factoring is thought to have originated in Mesopotamian culture (the rules of factoring are preserved in the Code of Hammurabi), and was part of English life as early as the 1400s, and came to the United States in the 1600s. It quickly became the predominant form of financing working capital for the then high Growth rate textile industry {Insert Link: https://en.wikipedia.org/wiki/Factoring_(finance)].

Factoring is worth considering as a strategy particularly in the following circumstances:

Growth is out-stripping cash flow and factoring your invoices let’s you take up opportunities you might not ordinarily be able to take

There’s a lengthy period to delivery on the project or products

There’s a need to maintain or renew stock levels between delivery and payment of current stock

The company has limited access to alternative business funding facilities

One of the key benefits to a company that enters a factoring arrangement is that the business is not incurring debt but essentially using it’s sales to give the business more cash flow flexibility.