Factoring is used extensively across the world, including Europe, the UK, the US and South Africa. It supports the cash flow of SMEs, many of whom ordinarily cannot offer their customers credit terms of 30 days and more.
According to Factors Chain International (FCI), the world total factoring volume for 2018 was 2,4 billion Euros. In South Africa, factored turnovers are in excess of R25 billion per annum.
Factoring unlocks many benefits. If you make it a part of your business model, you will be able to spend time growing your business and generating profits - rather than chasing customers for money and then putting out fires.
Companies who qualify for our factoring would typically have an annual turnover from as little as R1 million to as much as R300 million.
Benefits of factoring
The benefits of invoice factoring include:
- Increase in sales and profits
- Cash for expansion
- Increased margins and improved credit rating
- Saved management time
- Minimising potential bad debt
- Improved return on capital
- Expansion without loss of equity or control
- Development of new product lines
- Purchasing advantages by being able to buy in larger quantities
- Purchase discounts through prompt payment of suppliers (discounts and increased profits should more than offset our charges)
- Available funds for special opportunities, emergencies and seasonal peaks
- A more competitive position for you in the marketplace
- An improved standing with suppliers and customers
- Since we in effect become your partner, you have the added advantage of our expertise, which will benefit the smooth operation of your company
Factoring vs Non-Factoring
|Debtors (60 days)||2,000,000|
|Net Profit = 10%||1,200,000||1,800,000||600,000|
|Bank Facility = Overdraft (30% x debtors) COST: P + 2% p.a||600,000|
|Orders on hand to push turnover to R1.5 Million per month or R18,000,000 p.a. but cannot execute due to lack of working capital…|
|Solution = Factoring|
|Facility: 75% x R2 Million = R1.5 Million against same security||
|Additional cost to factor: Factoring Fee 1% x R18,000,000||(180,000)|
|Postage, Telephone, Fax, Etc||2,000 p.m.|
|Debtors Clerk time||5,000 p.m.|
|EG: 30% of turnover @ 5% p.m. = 30% x R1.5 Million x 5% = R22500 x 12||270,000|
|Profit on additional turnover: 10% x R6,000,000||600,000|
|Better off by a net amount of (By Factoring)||
How invoice factoring and financing works
You enter into a contract with us in which you agree to factor your credit sales. In short, the subsequent workflow is as follows:
- You receive a purchase order from your customer
- You complete the work and deliver product or service
- You raise an invoice
- You send the invoice to the customer, and a copy to us together with the POD
- We pay up to 75% of the invoice
- We ask your customer to settle
- We wait for payment
- Your customer settles
- We give you the balance of 25% of the invoice, less our administration fee
Our professional credit controllers will administer your sales ledger on your behalf. They will assess your clients' creditworthiness, attend to credit control and debtor administration, take care of collections, and - if needed - institute legal action.
This means that you are always kept well informed of all transactions by means of clear, comprehensive sales and related management information by email, hardcopy or through the 24/7 online access via our website.
Qualifying criteria for a business to become a potential invoice factoring client of Merchant Factors
- You sell on credit terms not exceeding 120 days
- You deal business to business only. Sales to debtors who are individuals or sole proprietors are excluded
- You sell on an outright basis, not on consignment or "sale or return"
- You have no contractual obligations that need to be performed at a future date (such as retentions, progress payments, interim claims or draws)
Debtor administration services
We cannot overemphasise just how much value our debtor administration services can add to any SME! Our debtor administration services cover:
- Opening of new debtors accounts
- Checking the completion of credit application forms
- Performing the necessary credit checks
- Accessing credit limits by means of reference to the credit reports obtained through Experian (previously Kredit Inform), ITC and our own database
- Sending reminder letters and final demands where necessary and as guided by our clients
- Verifying deliveries as an after-sales service
- Assisting in the settling of disputed accounts and liaising with attorneys when accounts are handed over. This is done in consultation with our client
The Bricks and Mortar trap
The overdraft is based on the value of bricks and mortar, and does not grow with your turnover.
In a fast growing business the cash requirement is likely to be high to pay for materials or services before receiving payment from customers. The overdraft has no flexibility to accomodate this growth.
If growth is allowed to a level where the cash requirement line crosses the overdraft line, the business could experience a cashflow crisis even though it is financially successful.
The funds available from Merchant Factors increases as turnover increases, thus avoiding the potential cashflow crises.