Business mentor: 'Factoring' gives cash certainty

Q. I'm really proud of what I have achieved in my business. In the past two years, our sales have gone from strength to strength. But our growth has brought a few cashflow challenges that have been a real headache. We could pursue an opportunity to continue our sales growth but it could put more pressure on our cashflow. I don't want to increase my present borrowings. Can you tell me about factoring?

Small business sector specialist Sarah Trotman replies:

A. Congratulations on your business successes to date.

It seems to me that there are two main aspects to your question.

The first and more important is that you have an opportunity to further increase your sales but lack capital to fund this growth.

The second is you are unsure if factoring is the solution.

You don't mention what your terms of business are or whether your customers are paying to your agreed credit terms. For the purpose of this reply I will assume they are 20th of the month and that most customers pay there or thereabouts, as it would have been difficult to achieve your present growth if this wasn't the case.

Some business owners regard unpaid invoices as a problem. It is, however, vitally important to realise that the debtors ledger is a current asset of your business. The challenge business owners face is that it is purely evidence of work having been completed and is not tangible until you are paid.

Factoring essentially speeds up your business cashflow cycle. It enables you to release cash tied up in unpaid invoices on an ongoing basis. This means you can borrow up to 80-90 per cent of the face value of the invoice today to exploit the opportunity that you have uncovered to increase your sales tomorrow.

There are two main types of factoring: Notified (full service and partnership) and non-notified (confidential and invoice discounting).

Most companies use a full service facility. This means the factoring company looks after your accounts receivable ledger, sends statements and provides a comprehensive range of reports regarding the collection of accounts.

There is an interest charge on funds drawn down that is comparable with bank overdraft.

Depending on the level of security the bank has, I have seen occasions where the factoring company's interest rate is more competitive.

There is also an administration charge calculated against the face value of the invoice. This can generally be 1.5 per cent plus or minus depending on the level of turnover, number of invoices and debtors and the type of facility offered.

Just remember that you are receiving a service for this charge and it may mean that you can spend more time getting out and growing your business instead of chasing old debt, or alternatively, not having to employ someone to do it.

Control of your customers remains with you. You still control pricing, invoicing, dispute resolution, your credit policy and with whom you deal.

Some would argue you have more control as you are receiving payment up front for outstanding invoices, allowing you to pay suppliers on time and/or negotiate early-payment discounts, giving you control of your cashflow.

When considering a financier, consider how well established they are, how financially strong they are and what other products and services they may be able to offer. Are they relationship driven? Can you view your account over the internet?

I had an interesting conversation about factoring with the people on the ORIX recently. Across the Tasman, factoring has increased from $2.5 billion to $25 billion a year in the past 10 years. Although we Kiwis pride ourselves on our ingenuity and ability to do anything with a piece of No 8 wire, we're a bit slow and at times conservative about the take-up of new financial products and ideas.

* For more information on factoring in New Zealand, contact Andrew Curry, business finance manager for ORIX New Zealand on 09 520 9700.