Factoring Articles

Dispelling common misconceptions about factoring


Dispelling common misconceptions about factoring Many growing companies in South Africa, especially SMEs, are seeking business finance that provides more flexibility than a traditional bank loan or overdraft facility. Not all organisations are able to weather the lengthy approval processes that often go hand-in-hand with bank finance. They require working capital solutions that keep pace with their operational cycles or scale with their turnover.

Factoring is a fast, flexible and strategic working capital solution that has been adopted by many businesses in South Africa – to the extent that factored turnovers across the country are now in excess of R25 billion per annum.

However, despite the growing popularity of this well-established and globally-utilized business finance strategy, some SMEs are still reluctant to explore factoring due to misconceptions that cloud their view of this innovative funding method.

What is factoring?

Factoring is a way for growing businesses of all sizes to unlock the capital that is tied up in their accounts receivable (i.e. invoices). Instead of suffering through seasonal fluctuations in demand or waiting months and months for payments due on credit sales, a factoring company can advance funds against a company’s outstanding debtor balances.

    This boosts cash flow, so the business can:
  • Cover day-to-day operational expenses
  • Invest in stock, equipment and other resources required to fulfil the next round of orders
  • Take advantage of new business opportunities
  • Continue putting growth plans into action

With factoring, the amount funded is based on turnover and not tied to bricks and mortar value. This enables the company to access business finance that is commensurate with its income.

FICTION VS. FACT

Misconception # 1: Factoring is a solution for businesses in financial trouble

Factoring is certainly a lifeline for companies with cash flow problems. But these issues are caused by credit terms that outlast cash reserves rather than poor turnover. Most companies that enter factoring agreements are experiencing an upwards business cycle. Factoring firms also tend to partner with businesses that have sound, creditworthy customer bases.

Misconception # 2: Factoring is only for large companies

In reality, factoring can suit any business that trades with another company. This includes small and medium enterprises – companies that often have smaller working capital reserves to draw on and therefore find it more challenging to wait months and months for payments due. For these SMEs, factoring provides the perfect cash flow solution.

Misconception # 3: Factoring is a loan

Factoring is the sale of an asset (accounts receivable) and therefore does not create a liability on the balance sheet. With a bank loan, a company must pay back the principal loan plus interest. Factoring, by contrast, is not a loan and the company therefore does not incur debt when factoring.

Misconception # 4: Factoring damages customer relationships

Some businesses worry about how their customers will react when a factoring company enters the picture. However, leading factoring firms handle credit control with such respect and professionalism that this reflects well on the company and adds value to the customer relationship. The company also avoids having to broach sensitive issues surrounding collections directly with customers, which ultimately creates a more positive customer experience.

Misconception # 5: Factoring is just a financial transaction

Factoring firms provide a range of debtor administration and credit control services to the businesses that partner with them. By evaluating customers’ creditworthiness, phoning debtors for payments due, sending reminders and final demands, handling receipting and reconciliations, and more – factoring companies liberate business owners from having to do this work or dedicate resources to these tasks. This represents a significant time and cost saving.

Why choose Merchant Factors?

Merchant Factors has been providing working capital solutions to SMEs and growing businesses for almost 30 years – providing these organisations with an innovative and flexible alternative to bank finance, while supporting them with expert credit control and debtor administration services.

Merchant Factors’ independence, experience and flat organisational structure means that, unlike many larger financial services institutions, Merchant Factors can customise its facilities to suit most companies’ unique needs.

This independence also enables Merchant Factors to offer the shortest turnaround time in the industry from application to pay-out.

For fast, flexible finance – contact Merchant Factors today

Finance beyond the Numbers.

The value of having credit-worthy customers


The value of having credit-worthy customers Many business owners lose sleep agonising over their credit scores – which can be a major obstacle when applying for finance. A blip in your company’s credit record, even based on an issue that was resolved years ago, may affect your ability to access a bank loan or overdraft facility.

Fortunately, traditional bank finance is not the only lifeline available to businesses in need of working capital. Factoring, a funding strategy used by enterprises of all sizes in South Africa and abroad, focuses on your customers’ creditworthiness rather than your own.

This means that you can move beyond worrying about your own credit score. It also means that you need to have a sound due diligence process in place, for both new and existing customers, to ensure that you only sell on credit terms to those customers who are willing and able to pay on time, and in full.

How factoring works

Most businesses that trade with other businesses sell their products or services on credit. If you’re such a company, you may experience months where there’s very little cash flowing into your business. Waiting months and months for your customers to pay can leave you with insufficient funds to cover your day-to-day expenses. This is a risky position to be in; and one that is not conducive to growth at all.

Factoring gives you the ability to draw cash back into your business before your customers pay, by unlocking the working capital that is tied up in your outstanding debtor balances. This is such a fast and flexible way to enhance your cash flow and continue growing your business, without having to sacrifice equity or control.

You also avoid having to jump through endless hoops to secure finance from the banks, which often takes so long that it doesn’t match the needs of your unique operational cycle at all.

Are your customers credit-worthy?

The more credit-worthy your customers are, the more value you will derive from a factoring agreement. But you don’t need to handle all the due diligence on your own.

Merchant Factors provides a comprehensive debtors’ book administration and collection service as part of a factoring agreement. Trained professionals on the Merchant Factors team also manage credit control, conducting detailed credit checks and assessing credit limits with access to a range of leading databases, including Merchant Factors’ own. This helps companies to identify high risk debtors early, and prevent losses and bad debts from crippling the business.

    This expert service includes:
  • Opening new debtors’ accounts
  • Checking the completion of credit application forms
  • Performing the necessary credit checks and assessing credit limits
  • Sending reminder letters and final demands where necessary and as guided by clients
  • Verifying deliveries as an after-sales service
  • Assisting in the settling of disputed accounts and liaising with attorneys when accounts are handed over (in consultation with clients)

Merchant Factors always keeps companies well-informed of all assessments and transactions by means of clear, comprehensive sales and related management information. This is shared by email, in hard copy or via an online portal that is available around the clock.

Finance that grows with your business

With Merchant Factors, your finance agreement is based on your turnover rather than the value of bricks and mortar. This means that your business model or expansion plans are not limited by an inflexible overdraft cap or loan amount. Rather, your access to working capital grows as your revenue increases.

The danger of not choosing a scalable funding approach is that your business could outgrow your loan amount, once again plunging you into a cash flow crisis. With factoring, your finance matches your operational cycle and your unique business needs.

Why Merchant Factors?

Merchant Factors was founded in 1988 to offer growing businesses an alternative to traditional bank loans. The firm is a leader in local and cross-border finance; and is able to tailor its facilities to suit most emerging small and medium size businesses. Since its inception, Merchant Factors has supported over 2000 growing companies.

As the only truly independent debtor finance institution in South Africa, Merchant Factors can offer the shortest turnaround time in the industry from application to pay-out, in addition to comprehensive debtor administration services.

For fast, flexible finance – contact Merchant Factors today

Finance beyond the Numbers.

Does factoring affect customer relationships?


Working capital and credit control services to take your business forward SMEs in South Africa and abroad use factoring to improve their liquidity ratios and keep their business finances healthy. Factoring is a form of debtor finance that involves a company selling its invoices to a third party (a factoring company) to improve cash flow and ensure ready access to the working capital required for growth.

When a business makes a credit sale, payment is normally due within a pre-determined period, typically 30, 60, 90 or even 120 days. With a factoring contract in place, the organisation does not have to wait for months to receive cash against the sale. Rather, it can access funds immediately – to fund daily operations, pay salaries, cover rent and fuel growth.

However, converting sales into cash is just the beginning. When handled by an expert factoring company, this approach to business finance also enables companies to cut complexity in the back office.

Factoring saves time and resources

Many companies choose factoring over bank finance due to the extensive support that reputable factoring companies provide in the areas of credit control and debtor administration.

When a business enters a factoring agreement with Merchant Factors – a financial institution that has been providing working capital solutions to growing businesses for almost 30 years – Merchant Factors acts as the company’s accounts and credit control department.

    The services provided by Merchant Factors include:
  • Opening of new debtors' accounts
  • Performing debtor credit checks and assessing credit limits using intelligence gained from Experian, ITC and the Merchant Factors database
  • Sending reminder letters and final demands where necessary
  • Verifying deliveries as an after sales service
  • Banking receipts and allocating payments made according to remittance advices received from debtors
  • Assisting in settling of disputed accounts

How this benefits business

Many smaller businesses do not have the capacity, skills or budget to handle these processes effectively and successfully in-house. With Merchant Factors handling credit control and debtor administration, the business does not need to acquire or retain these sought-after (and therefore costly) skills.

Beyond saving time and money, the business owner also avoids having to deal with overdue invoices or disputed accounts personally, which is a huge relief. These types of interactions can be stressful and place strain on the good relationships that the business has built with its customers. Merchant Factors acts as a buffer between the business and its clients in this regard.

Does factoring impact customer relationships?

Some businesses are concerned about how their clients will react when Merchant Factors begins dealing with them.

Merchant Factors understands that healthy customer relationships form the bedrock of any business strategy. In today’s competitive commercial landscape, the customer experience can be the difference between maintaining and losing a business relationship.

To this end, Merchant Factors handles credit control with the utmost respect and professionalism. A team of highly-skilled and experienced credit control professionals will quickly develop relationships with the company’s customers, ensuring efficient collection of monies owed – in a way that reflects well on the company.

Merchant Factors also helps to explain its involvement and correct any misconceptions that a company’s customers may have. Factoring is a well-established business finance strategy that is used by many companies in South Africa and internationally. Over R25 billion in turnover is factored by South African businesses each year – helping to fund growth and keep businesses healthy during seasonal fluctuations in demand.

It’s also important to note that factoring does not require an SME to relinquish control of any important customer or business decisions. Should it be necessary for Merchant Factors to issue a final demand, for example, it will only do so in conjunction with the company. Existing clients often use Merchant Factor’s disciplines as an “excuse” thus avoiding any negative impact on their relationship with the debtor!

Why Merchant Factors?

Merchant Factors was established in 1988 to offer growing businesses with an alternative to traditional bank finance. Since its inception, Merchant Factors has provided financial and professional support to over 2,000 organisations, enabling them to keep their business strategies on track.

Also, as the only truly independent debtor finance institution in South Africa, Merchant Factors offers businesses the shortest turnaround time in the industry from application to pay-out.

For fast, flexible finance – contact Merchant Factors

Finance beyond the Numbers.

Invoice factoring and invoice discounting: what’s the difference?


Working capital and credit control services to take your business forward As a small or medium enterprise, you may be looking for an alternative source of business finance – a funding mechanism that does not carry the same limitations as a traditional bank loan. You may need faster access to finance than the banks are able to give you; or you may be looking for a working capital solution that grows with your turnover.

Factoring is a financing strategy adopted by businesses around the world to unlock the cash that is tied up in their accounts receivable (i.e. invoices). Instead of waiting months and months for the payments due to you on your credit sales, a factoring company can advance working capital against your outstanding debtor balances.

This is a smart way to stay cash flow positive, so you can continue paying your operational expenses while also funding your business growth plans. The amount of money you receive is based on your invoice amounts and not tied to bricks and mortar value, so you can access an amount that is commensurate with your income.

Invoice factoring or invoice discounting?

Invoice factoring is often confused with – or compared to – invoice discounting. While these two financial services have some similarities, they are not one and the same.

With both invoice factoring and invoice discounting, a third party provides the working capital against the accounts receivable of a business. With factoring (or sometimes referred to as “invoice factoring”), the third party (a factoring company or Factor) buys the credit sale invoices from you. With invoice discounting, the third party generally uses the accounts receivable as collateral for the funding.

There is no loss of equity or control of the business with either option.

Sales ledger management

    When you enter into a factoring agreement, the factor acts as your accounts and credit control department, taking over the following functions:
  • Opening accounts for new customers;
  • Managing credit checks and assessing credit limits;
  • Handling collections and payments;
  • Sending reminder letters and final demands where necessary;
  • Assisting in settling of disputed accounts; etc.

With invoice discounting, on the other hand, all these roles remain your responsibility. You continue to administer your own sales ledger, chase payments and manage credit control processes.

Due to the amount of back office support provided, which frees up time and other resources, factoring will most likely appeal if you do not have the budget, staff, time or patience to manage these functions in-house. Essentially, factoring gives you an expert and highly professional credit control team at your side.

Acknowledging that there’s a third party involved

When you opt for the factoring route, your customers will be made aware that you have handed your debtors’ book over to a factoring company.

With invoice discounting, however, you continue to collect payments from your customers directly, and they are usually unaware that there’s a third party involved.

While confidentiality may be very important to you, it’s essential to note that factoring is a well-established and well-respected financing method worldwide – for many different reasons.

Many companies choose to factor their invoices to ensure that they have enough cash available for growth, whether they’re planning to buy more stock, upgrade equipment, increase their talent pool or expand their footprint. An expert and professional factoring company can explain their involvement to your customers in these terms, dispelling any concerns they may have around dealing with a third party.

Which option is best for your business?

Every company has own unique business goals, financial needs and customer relationships. All these issues will influence the decision between factoring and invoice discounting.

If factoring sounds like the right option for your business, be sure to select a factoring company that has the experience, reputation and independence to provide your business – and your valued customers – with the exceptional level of service deserved.

Why choose Merchant Factors?

Merchant Factors has been providing working capital solutions to SMEs and growing businesses for almost 30 years. The company was founded to offer organizations in South Africa with a sound alternative to traditional bank loans and overdrafts – and today, Merchant Factors is the leading independent factoring specialist.

Bringing a team of expert credit-control professionals with it, Merchant Factors liberates businesses from having to evaluate their customers’ creditworthiness, phone debtors for payments due, send reminders and final demands, or handle receipting and reconciliations. This enables small business owners to focus on business issues instead of wasting hours and hours chasing payments and juggling other sales ledger duties.

Merchant Factors’ independence, experience and flat organisational structure means that, unlike many larger financial services institutions, it can customise its facilities to suit most small and medium size emerging businesses, no matter whether their turnover is R100,000 or R15 million per month.

This independence also enables Merchant Factors to offer the shortest turnaround time in the industry from application to pay-out.

For fast, flexible invoice financing – contact Merchant Factors today.

Finance beyond the Numbers.

Working capital and credit control services to take your business forward


Working capital and credit control services to take your business forward Factoring is a type of business finance that provides an alternative to traditional bank loans and overdrafts. Despite local businesses factoring over R25 billion in turnover each year, some South African companies are still unfamiliar with this funding strategy, designed to provide growing businesses with fast access to working capital.

Many companies offer their customers products or services on credit. This means that these businesses must wait for 30, 60, 90 or even 120 days before receiving the funds that are payable on invoices due. This can have a significant impact on cash flow and almost always restricts business growth.

How factoring keeps companies in business

Factoring is a solution provided by various financial services providers, including banks and independent factoring companies, that enables an organisation to draw cash back into the business before the customer pays.

When partnering with Merchant Factors, a totally independent finance house founded in 1988, up to 75% of the value of an invoice can be paid on presentation of the POD, with the balance being paid as soon as the customer settles the account in full.

Back office support: the added advantage of factoring

Unlike many other financial institutions whose service extends to the provision of finance only, Merchant Factors provides much-needed support in another challenging area: the administration of the debtor’s book.

Collecting and managing payments requires a significant amount of effort and also uses valuable time that could rather be spent running the business. Add to this the headache-inducing instances where customers are difficult to reach or payments are overdue, and this process becomes an arduous one that wastes many precious working hours.

As part of its comprehensive factoring solution, Merchant Factors handles sales ledger administration on behalf of the business. This is similar to providing the company with an entire accounts and credit control department – a service that saves hours and hours of valuable business time.

    Merchant Factors’ team of trained credit control professionals handle the following processes:
  • Opening of new debtors' accounts
  • Checking the completion of the credit application form
  • Performing the necessary credit checks
  • Assessing credit limits
  • Sending reminder letters and final demands where necessary and as guided by clients
  • Verifying deliveries as an after sales service
  • Banking receipts and allocating payments made according to remittance advices received from debtors
  • Assisting in settling of disputed accounts and liaising with attorneys when accounts are handed over

All of these services are carried out in consultation with the business. At no point does the business lose control of its debtor’s book, customer relationships or company reputation.

A completely professional service

Most companies are relieved to save the hours they would otherwise have dedicated to chasing payments/managing collections. However, some businesses may be concerned that their customers could react negatively to the prospect of dealing directly with Merchant Factors.

Merchant Factors understands that collections are an important step in the customer journey and that good customer relationships are a valuable asset. This is reflected in the professional way that Merchant Factors introduces its team and handles credit control. Their expert service not only reflects well on the business but also provides a welcome shield between the business and the delicate issue of ‘difficult’ collections.

Merchant Factors’ team of highly experienced administrative and credit control professionals quickly develop solid relationships with the business’s customers to ensure both positive customer experience and efficient collection of monies owed.

Complete transparency

Another benefit of teaming up with Merchant Factors is their 24/7 online system that provides clear, comprehensive sales and related management information. The business can monitor all aspects of its factored debtors’ details every step of the way.

About Merchant Factors

Merchant Factors was established almost 30 years ago to offer an alternative to the lengthy processes and limitations applicable to the funding that banks generally make available to their clients, including growing small and medium sized businesses. The financial solutions that Merchant Factors offer are innovative, flexible and fully focused on fostering business growth.

Since its inception, Merchant Factors has provided financial and professional support to over 2,000 organisations, enabling them to keep their businesses running smoothly and successfully.

Significantly, as the only truly independent debtor finance institution in South Africa, Merchant Factors offers businesses the shortest turnaround time in the industry from application to pay-out.

Unlock working capital and professional administrative support today. For fast, flexible finance – contact Merchant Factors.

Finance beyond the Numbers.

How factoring helps to reduce your risk of bad debt and losses


How factoring helps to reduce your risk of bad debt and losses Regrettably, many businesses in South Africa have experienced a painful loss of income due to unpaid accounts receivable. Bad debt expenses occur when a business is unable to collect the funds that it is owed, because the debtor is facing bankruptcy or other financial problems, and all reasonable efforts to collect these outstanding payments have been exhausted.

Of course, their loss is not just limited to the amount owing on the invoice. It also includes the time and raw materials that were committed to fulfilling the order or providing the service, as well as the future anticipated earnings from that client who suddenly ‘went under’.

It’s not surprising that the risk of doing business with a high credit risk customer can keep even the most experienced business owners awake at night. While they may have gone to every effort to assess customers’ creditworthiness and ask for trade references, the amount of due diligence required to really “know your customer” can be incredibly time consuming and costly. The expense of accurate credit checks and the like may be unaffordable for some smaller businesses.

However, bad debt losses can be a serious challenge for business owners who need constant cash flow to keep their companies operating efficiently. Often, a bad debt can mean there’s no working capital available to the company to pay salaries, operate equipment, cover rent and electricity, and meet other critical day-to-day business expenses.

Even when a company does have some cash to cover everyday expenses, unpaid invoices – with no hope of collecting these payments – could also send a business right back to square one: a place where there’s absolutely no working capital available for growth.

Fortunately, there’s a solution.

Factoring companies are credit control experts

‘Remember that the six most expensive words in business are: “We’ve always done it that way” – Catherine De Vrye.

Sometimes, the best risk control strategy is to outsource the risk mitigation and control function to an expert partner. Teaming up with a well-established, trusted and experienced factoring company helps organisations to minimize bad debt losses and ensure they sell on credit only to creditworthy customers.

Factoring is a business finance solution that is used by organisations around the world; and an industry that is growing rapidly. It involves a company selling its accounts receivable to a factoring company. This unleashes working capital and helps to protect the business against the risks of running out of cash while they’re waiting out credit terms on their accounts receivable (sometimes up to four months).

Yet this is only part of the value that factoring companies can provide to their clients. Factoring specialists also offer expert debtor administration services on behalf of the businesses with which they partner. This saves many valuable business hours that could be spent pitching for new business or landing a new contract.

At Merchant Factors, a dedicated team of debtor administration and credit control professionals analyse delinquent debtors to help clients prevent losses and bad debts. This also facilitates the early identification of high risk debtors.

Merchant Factors makes the debtor administration and credit control process as painless as possible. This includes handling the opening of new debtors' accounts, checking the completion of the credit application form, performing the necessary credit checks and assessing credit limits using intelligence gained from Experian, ITC and Merchant Factors’ own comprehensive database.

With Merchant Factors making informed, expert credit decisions on behalf of businesses, the risk of bad debt losses is significantly reduced.

    More reasons to partner with Merchant Factors:
  • Complete transparency:
    Merchant Factors provides clients with a 24/7 online system that provides clear, comprehensive sales and related debtor management information
  • A strong track record:
    Merchant Factors was established in 1988 to offer growing businesses an innovative, fast and flexible funding alternative to bank finance. Over the years, Merchant Factors has provided financial and credit control support to over 2,000 organisations, enabling them to meet their business goals.
  • No lengthy waiting periods:
    As the only truly independent debtor finance institution in South Africa, Merchant Factors can offer businesses the shortest turnaround time in the industry from finance application to pay-out.

For fast, flexible finance and a robust credit risk control strategy – contact Merchant Factors today.

Finance beyond the Numbers.