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Thread: Debtors/Financing/Factoring

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    Debtors/Financing/Factoring

    Hoping to get some advice here.

    I'm sure a lot of business' have problems with debtors not paying. This results in a lot of time and effort (costs) to get the money in. I know that you can factor your debtors book.

    However I was wondering whether there isn't a kind of debtor 'financing' or invoice 'financing'? For example I invoice XYZ Bank for purchases made by ABC motors. XYZ Bank then pays me directly (minus a fee, maybe the settlement) and collect their money from ABC Motors. I cannot imagine that someone hasn't thought of this, but I cannot find anything on the interweb.

    One of my suppliers actually made a similar arrangement with their customers. I upload invoices to the bank, the bank pays the supplier within 5 days. I get 60 days interest free to pay the bank, and still get my settlement. I currently have over R400k lying in 60 days and older...

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    Diamond Member Blurock's Avatar
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    Debtor finance or invoice discounting is one of the best ways to finance a new or expanding business as it accelerates cash flow.
    It actually discounts future cashflows so that you can buy raw material/sock to do the next deal.

    There are some caveats, however.
    Your admin and paper work must be on the ball.
    It creates more admin, but is worth it as you will know exactly where you are with your finances.
    It is not suited for a business which is already in trouble or with declining income.
    Some people still think that there is a stigma to invoice discounting do to incorrect application for struggling businesses in the past.
    Not all debtors may be discounted as the bank will refuse the bad payers (which is a benefit, so you can wean them out)

    The benefits are:
    1. Accelerated cash flow enables early payment to suppliers who may give a settlement discount (improving profitability)
    2. Debtors are vetted by the bank/finance house.
    3. Defaulting debtors are followed up for payment by the bank. (there are 2 types of agreement; with recourse or without recourse).
    4. Regular audits gives you peace of mind ensuring that your admin/accounting dept. is performing well.
    5, Factoring is an asset based lending product. The debtor's book is your security and you do not have to pawn your house.
    6. Higher facilities are available than with bank loans or overdrafts which is essentially pawn broking.
    (facilities are flexible and based on the size of the debtors book. E.g. if the book grows, the facility can grow with it, but a declining book will see a reduced facility. That is why it is not suitable for a declining business)
    7. May have a positive influence on your balance sheet ratios such as solvency and liquidity.

    As a banker we have once financed a client who had 2 massive tenders, but not sufficient capital and cash flow to service it.
    Their T/o at the time was R2.5 mil. By bumping some heads I managed to get them a facility of R6 mil which they could only utilise if they had sufficient invoices or debtors. The business grew to a T/o of more than R40 mil in one year and they could then terminate the facility and be self funded.
    Excellence is not a skill; its an attitude...

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    A couple of questions out of curiosity:

    1. Isn't it expensive though?
    2. What kinda percentage do you give up to the financier?
    3. What happens if the debtor disappears?
    4. What happens if the debtor goes under?

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    Quote Originally Posted by adrianh View Post
    A couple of questions out of curiosity:

    1. Isn't it expensive though?
    2. What kinda percentage do you give up to the financier?
    3. What happens if the debtor disappears?
    4. What happens if the debtor goes under?
    1. Expensive is a misconception. You buy electricity to power your computer so that you can earn a living. You buy fuel for your vehicles so that you can move from A to B. Nothing in life is free, but paying a small fee to increase trade is acceptable. The accelerated cash flow often allows the business to negotiate a settlement discount from the supplier to offset the factoring fee. The caveat is that there should be an opportunity to increase trade, not to bail you out. In the example that I posted, the facility assisted the client to increase T/o from R2.5 mil and about 2k nett to more than R40 million and about R12 million profit in one year!

    2. The interest rate is about the same as an overdraft but often less if the book is fully insured. There is an added factoring fee which may vary between 0.5 - 3%, depending on the risk. The risk is associated with the debtor, not the business. The debtor's book is the security for the facility and debtors are therefore ceded to the bank/finance house. A new, small business supplying to an AA rated corporate business will get a better rate than a large business dealing with rats and mice and late payers.

    3 & 4. The debtors book is ceded to the finance house with or without recourse. Normally CGIC insurance will cover defaulters. Finance houses and banks build a profile on debtors just like a credit bureau. So if you pay late, your supplier is compelled to report you to CGIC or whoever he insured his book with.
    Excellence is not a skill; its an attitude...

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    Hi Bobby -

    I have just arranged this for a client - it saved the business and it was much easier than begging from your friendly banker.

    It is costly but the pros outweighed the cons, in my client's case.

    Call me for some details.

    Questor 083-703 7900

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    Quote Originally Posted by Questor View Post
    I have just arranged this for a client - it saved the business and it was much easier than begging from your friendly banker.

    It is costly but the pros outweighed the cons, in my client's case.

    Questor 083-703 7900
    It almost sounds as if this was done to save an existing business that is on the skids.
    In that case, it may not be the correct solution, unless the cash injection can be utilised to take advantage of opportunities to grow the business.

    Factoring is essentially a growth tool. It is an excellent tool to accelerate cash flow to expand the business.
    It should not be used to bail out a failing business, as a declining turnover would mean that you are getting less cash every month, but still have the expense.

    In the past, unscrupulous finance houses used this to generate fees at the expense of the business.
    As a result, factoring got a very bad name and suppliers shied away, once you have ceded your debtors book.
    Fortunately, people have woken up to the benefits of factoring and many success stories can be told as a result.
    Excellence is not a skill; its an attitude...

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    In fact the existing business was not on the skids.

    It had just secured a 6-month contract and issued the first invoice under the contract when the customer unilaterally changed the credit terms from 7 days to 30 days, hence the need for invoice discounting.

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    Diamond Member Justloadit's Avatar
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    Quote Originally Posted by Questor View Post
    It had just secured a 6-month contract and issued the first invoice under the contract when the customer unilaterally changed the credit terms from 7 days to 30 days, hence the need for invoice discounting.
    You said there was a 6 months contract, so changing the terms means that there was no written contract?
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar pumping, Solar Geyser & Solar Security lighting solutions - www.microsolve.co.za

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    There is a 6-month written contract which my client signed without referring it to me.

    Conveniently, there is no mention of payment terms in the contract.

    In my experience, large companies make no exception to the rules of the game when dealing with smaller companies. This is another example.

    Caveat vendor, maybe?

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    As small business we all chase that big order, however in the words of a very successful friend of mine who started his business with a plank as a table an computer in 1985, and now has a business of over R500m a year, "I would rather supply 20 screws at a markup of 100% then supply 1million screws at 0.01% markup".
    In the end the profit is almost the same, but the risk is astronomical.
    Stop chasing the big orders, they are financial traps, unless you have very deep pockets to sustain the business during the times that there is no financial income although you are trading.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar pumping, Solar Geyser & Solar Security lighting solutions - www.microsolve.co.za

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