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.