Factoring as an alternative means of improving cash flow is becoming more popular, in fact each year it is estimated that over R25bn of turnover is factored by South African businesses.
Factoring is a form of specialist finance aimed at supporting those that operate in the business to business environment. Funding is secured off the strength of the debtor’s book. It’s really a means of unlocking the cash that would ordinarily be tied up for 60 to 90 days as accounts receivable. In simple terms the debtor’s book is basically sold to a financial institution, who advance funding to the business and then administer and collect the outstanding amounts directly from the debtors as they become due.
The benefits of factoring vary depending where the entity is in its business cycle. An organisation that is experiencing high growth may find themselves constantly walking a financial tightrope between meeting customers’ needs and ordering greater volumes of stock from suppliers. Contrarily, a business that is experiencing a slow-down may need funding to keep the ship on course until things pick up again.
Factoring provides a working capital solution in both cases. Businesses that enter into factoring arrangements are generally surprised at how much easier it is to obtain funding as opposed to the seemingly never ending sequence of hoop-jumping imposed with traditional loans and overdrafts. A specialist in factoring is skilled in looking past the balance sheet and making an assessment based on the value locked up in the debtor’s book.
Another advantage of Factoring is that it can be tailored precisely for entities who are entering into or already in the Business Rescue process as per Chapter 6 of the Companies Act. As a Business Rescue Practitioner you have the often daunting tasks of monitoring and directing the recovery process of a distressed business.
Section 128(1) (b) of the new Companies Act does indicate, amongst other things, the development and implementation of a business rescue plan. Experience has shown that Factoring can and does provide a financially viable means to steer a company back on course, turning a failing business around in a situation where time and skilful decision making is of the essence.