The X Factor: what sets factoring apart from traditional bank loans?

Factoring is a financing strategy adopted by businesses around the globe to unlock working capital. Many companies can’t afford to wait for 30, 60 or 90 days until their clients pay their invoices. They need the cash that’s owing to them to pay salaries, process the next round of orders, or capitalise on new opportunities before their competitors do.

Sometimes referred to as “accounts receivable financing”, factoring involves a business selling its invoices (i.e. accounts receivable) to a third-party organisation, known as a “factor”. The factor then collects payment of the invoices directly from the business’s clients. Essentially, factoring gives companies the ability to draw cash back into the business when it is needed, rather than wait out the invoice payment terms.

Why factor?

Many companies choose to factor because they prefer faster payment on their invoices. This boosts cashflow and empowers these organisations to meet expenses and mitigate the risk of potential bad debt. It also gives them the freedom to upgrade equipment, acquire new employees and embark on other activities that grow the business.

Factoring can also put companies at a competitive advantage. Before, cashflow concerns may have forced them to walk away from deals with clients who could only offer payment terms of 30, 60 or 90 days. With factoring in place, however, these companies can accept these deals without compromising cashflow.

While factoring clearly offers numerous advantages, this is not the only way to finance your business. Many companies explore the traditional bank loan route first – sometimes because they simply do not know that factoring is an option.

Are you looking to boost your cashflow? Here’s how factoring differs from traditional bank lending.

Factoring vs. borrowing from the bank
  • Ease of access: In South Africa and the rest of the world, banks have been more risk averse since the financial crisis and subsequent global economic meltdown. In this challenging environment, many companies – especially SMEs – are struggling to access bank loans. Qualifying for a bank loan is an arduous process. The bank will review your company’s financials, assets and liabilities, and credit history. A bad credit record, even based on an issue that was resolved years ago, may put your business out of the running for a bank loan. Factoring, on the other hand, focuses on the quality of your customer’s credit, rather than your own credit score.
  • Turnaround time: Seda, an agency under the Department of Trade and Industry that focuses on small enterprise development, describes applying for business finance in South “is a slow, frustrating and disappointing process”. Banks can take a long time to process your application, sometimes up to eight weeks; and then you may still have to wait months before the cash is made available to you1. With factoring, however, you boost your cashflow almost immediately.
  • The amount you’re allowed to finance: When you borrow money from a bank, the amount is capped. Because this limit is based on the value of bricks and mortar, your access to capital does not increase as your turnover grows. With no flexibility to accommodate expansion, a business could grow too fast for the loan amount, which again results in a cashflow crisis. On the other side of the coin, factoring is scalable. The amount of money you can finance increases as turnover rises – because it’s based on your accounts receivable. In other words, your working capital matches your business needs.
  • The debt issue: When you borrow from the bank, you must pay back the principal loan as well as interest on top of this amount. By contrast, factoring is not a loan. This means that you do not incur debt when you factor.
  • Back-office support: While traditional bank loans do not come with the added advantage of debtor administration services, many leading factoring specialists offer valuable back-office support. Factoring firms can act as professional credit controllers, administering your sales ledger for you. They can evaluate your clients’ creditworthiness, phone debtors for payments due, send reminders and final demands, handle receipting and reconciliations, and even help you to liaise with attorneys if it becomes necessary to institute legal action. All of this frees up your time and resources, allowing you to focus on more strategic issues, such as increasing your sales and expanding your business.
Does your company require working capital, now?

Merchant Factors was founded in 1988 to offer growing businesses an alternative to traditional bank loans. We specialise in local and cross-border trade finance; and we’re able to tailor our facilities to suit most emerging small and medium size businesses. Since our inception, we have empowered over 2000 businesses to reach their financial goals.

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

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

Finance beyond the Numbers.