Will it suit your business?

The advantages offered by factoring to a business can be tremendous. Still, the arrangement requires careful management in order to reap the full benefits. Consider how suitable factoring is to your business’s particular needs and whether it will ease your current operations, or needlessly complicate them.

> Working With A Factor

Businesses work best with a factor are those that are expanding and have considerable amounts of capital tied up in trade debts. Factoring lets you work around those debts and transform them into useful capital.

Factoring is suited for situations where the deliverables are clearly defined. (e.g. service rendered, goods delivered or work completed).

To get the factoring process underway, documents of completion such a signed delivery receipt or a filled-out timesheet are required. Not every kind of transaction can be worked into a factor, and you may have to adjust your operations accordingly to make the process as efficient and as inclusive as possible. Or you may try to source a factor that can work with your existing systems.

In general, factoring is based on fixed-period credit terms of ninety days or less. If your operations do not normally fit within that interval, you may need to sort out your debt-recovery system before trying to work it into the factoring process.

> Sharing Information (or Disclosing Information)

Before discussing the terms of agreement for your business, a factor will first need to go over your sales records in order to know how many customers you deal with, assess their credit-worthiness and find out the quality your business relations with them. In general, having fewer customers equates to a greater amount of risk for the factor. Your past debt collection track record is also taken into account.

Furthermore, your paper trail is examined to determine the adjustments required of your existing system in order to integrate the factoring process seamlessly into your operations.

The factor expects to be kept up-to-date with any changes while working with you, and they need to know that the process is accountable at every stage in order to reduce chances for error or miscommunication.

> The Effect On Your Bookkeeping (Bookkeeping Considerations)

Letting a factor completely handle your sales ledger would most likely result in savings from reduced administration overheads, but you may prefer to maintain a set of parallel books as means of checks and balance against any possible errors committed on the factor’s side.

> The Best Way To Integrate With a Factor (Or, Integrating With a Factor)

For businesses that use SAGE or a similar bookkeeping system, the most effective approach may be to consider the factor as a bank account. In doing this, you do not have to alter the way you maintain your sales ledger, and there is no need to expand the ledger to include the factor. Payments from the factor can be treated as account transfers.

The factor will update you daily on any payments received from customers. These can be defined as “receipts” and credited accordingly in your ledger, and credit the payments to creditors as listed in the report from the factor.

Charges paid to the factor may be treated just as payments to any supplier and an account in the purchase ledger can be opened in the factor’s name for invoices to be posted.

Monthly statements from the factor are then checked against your own accounting records in the same manner as a current account. The factor will also submit a copy of their accounting of your sales ledger which needs to be checked against the information that you recorded.