Let’s be very clear, the factoring of debtor invoices is a good thing. The ability to convert credit sales into cash will help any business develop stronger liquidity. The real issue is, what type of factoring facility (Confidential vs Disclosed) is best for your business?
This blog post looks at the key considerations one must address in determining which option to take.
Confidential factoring (also known as confidential invoice discounting) is more expensive.
This is because there is a greater level of risk for the factor (provider of factoring services) when they are not involved in the debtor administration and the collection of accounts receivable.
A provider of a confidential facility will still charge an admin fee to manage the “shadow” ledger they need to create for their system. In addition, they will typically charge an “audit” fee for the regular inspections they will make of a client’s accounting and sales records.
In a disclosed facility the factor takes on the role of debtor administrator therefore the outsourcing of the accounts receivables function typically results in cost savings for the client concerned.
A provider of disclosed facilities will respect your customers and the relationship you have with them. In fact, they prefer to have minimal contact with them although they do respond to queries, prepare and send out monthly statements and follow up on overdue accounts in a polite, professional but persistent manner.
A provider of a confidential facility may still contact your customers if they feel their position or security is at risk i.e. in the event of accounts becoming overdue by an extended period of time.
Factoring is now considered mainstream and is recognised as a smart way of managing working capital. The finance rates are comparable to a bank overdraft and typically there are a greater level of funds available for a business than an overdraft provides.
Before signing any legal contract you should have a lawyer review the document.
Both confidential and disclosed factoring involve the sale of invoices to the factor. There is debate as to the legality of forwarding invoices and related statements to a customer under the pretext that you are still the owner of these invoices and are entitled to the proceeds of the invoices. This is an issue you may wish to seek clarification on if contemplating a confidential facility.
If you have good internal collection practices, are not concerned about paying a high rate and don’t mind the inconvenience of the regular audits then confidential factoring is good for you.
If you are seeking a cost effective funding solution and are looking to save on admin and improve the efficiency of your accounts receivable function then disclosed factoring is the best solution.