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Published Articles by David Balovich

Title: Alternatives To Credit Hold
Published in: Creditworthy News
Date: 8/27/02

   
It 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 country

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 sellers invoice.

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.


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