Debtors/Financing/Factoring

[Blurock]

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.