was the Spanish philosopher Jorge Santiago who said that those who
fail to pay attention to history are doomed to repeat their mistakes.
Now granted he did not say those exact words. I have taken liberty, as
it has been many years since Philosophy 101.
However, often times
the past holds the answer to how we can improve the performance of our
account receivable portfolio and at the same time reduce costs. All
too often we are consumed with advancing technologies to improve what
we are doing and the key to success simply lies in reviewing the past.
One of the methods of
alternative financing and reducing cost is still with us today but is
rarely considered, factoring. Once widely used by many industries in
the 50ís, 60ís and 70ís factoring fell out of favor as more
industries succumbed to offshore production in the early 80ís.
Factoring originally grew out of the specific need for operating
capital in certain industries such as textiles, consumer electronics
and appliances. Goods no longer manufactured in quantity in this
Among the principal
reasons that companies used factoring was to reduce credit &
collection expense, provide for capitalization without additional debt
and to increase profits by focusing on product development, production
and sales. Factoring companies and banks that provided factoring
services assumed the credit and collection function for the seller at
a negotiated fee. Unlike asset based borrowing where the seller
retains title to the goods, in factoring title passes from the seller
to the factor and the seller receives a percentage of the receivable
immediately, usually 85 to 90 cents on the dollar. Often times a
reserve was established, usually 5% and if the sellers customer paid
the factor within the invoice terms then this reserve amount was
rebated back to the seller at the end of each quarter. If not the
factor kept the reserve. It was not uncommon for the seller to receive
85% of the invoice immediately and then an additional 5% at the end of
a quarter thus realizing a cost of only 10%.
STEPS IN FACTORING
The seller receives
an order from the buyer and contacts the factor for approval.
The factor approves
the order and provides the seller an authorization number.
The seller fulfills
the order and ships to the buyer.
The seller prepares
an invoice with the factors authorization number and a stamped
message informing the buyer that the invoice has been sold to the
factor and to send payment to the factoring company address that
is provided on the invoice.
A second copy of
the invoice is sent to the factor who upon receipt prepares it for
payment, less the negotiated fee, and pays the seller within the
stated terms of their agreement usually before the date of the
The factor assumes all responsibility and
risk in collecting the receivable. The seller has their money within
terms and is prepared for the next sale.
Another benefit in factoring receivable
is that should the buyer be unable to pay the factor when the invoice
comes due. The factor may offer financing programs that permit the
buyer to pay out the invoice in installments known as curtailments.
This permits the factor to make even more money on the transaction.
Factoring may not be an alternative to
everyone but for many it is an alternative method for increasing sales
and reducing collection costs.
I wish you well.