[Mike Allen]

We have a new customer in Mexico and have been asked to consider using factoring.  In the past we have used credit insurance to support our sales, however we stopped covering our customers years ago due to the small volume. Have any members used factoring and what are the pros and cons of this method?

[Brian Work]

Hi Mark,

I am on the banking side with Wells Fargo. We have factoring programs that we work with to support client sales outside of the US such as Mexico. It does require larger volumes to make it worthwhile for setting up a customer in a factoring program which if the volume is not there maybe credit insurance may be a first option. One of the main positives of factoring from the suite of banking products is that it remains as a form of open account vs. other products such as standby’s or commercial LC’s (process can be tedious and delays can occur). Another positive is that the programs may be able to be structured as off balance with a true sale opinion which may provide more of a benefit for publicly traded companies. The factoring programs may be non-recourse meaning that the bank is taking the full credit risk of buyer (your client). The programs do improve cash flow since you are able to sell the account receivables and receive cash to improve liquidity. Some of the cons are that it may be more expensive than other forms of traditional financing which reduces profit margins. Happy to answer any other questions. Thank you!

Brian

[Alfredo Puerta]

Hi Mike, in Mexico using factoring for payables is a common practice especially in manufacturing. Banks and other financial institutions offer the service and companies use it to either extend their terms and improve their cash flow.

In most cases is a good alternative, that requieres a little extra admin work but is worth it.

You need to be aware of the following:

1) some companies will close a deal only if you agree to get paid using a factoring service absorbing the discount. You can negotiate in most cases not to pay for the discount.

2) The company might ask you to wait until your invoice is about to reach due date to request the benefit (a way for them to extend terms).

Hope this helps, Alfredo

[Tim Bastian]

Hi Mike,

Have from time to time bumped into factoring arrangements.  My understanding is that there are some industries where factoring is very common, such the clothing business.  Essentially factors will discount the AR you are owed and pay you more promptly,  there are many larger companies that tend to try and force this on vendors, even if they are doing internally and profiting from it. When we receive a notice from a factoring company who has a deal with a vendor, we often begin looking for other vendors, the cost of factoring is relatively high compared to other forms of finance, there maybe recourse for past due amount, it is a red flag of sorts. It all depends on the terms of the agreement, at the end of the day you are inserting a third party into the equation with your customer or in some instances re-negotiating terms of sale after the fact.

You may want to speak to your banker about EXIM bank products that could do the same thing. A lot depends on the transaction size and frequency along with strength of your AR as to whether they will do single account deals or want to consider portfolio program. your banker should be able to advise as to other companies that may buy the AR on a go forward basis. Your own financing agreements that may pledge AR  as collateral could be a stumbling block to some products or programs.

There are options out there that may give you better control for lower cost.

 

Thank a great day.

 

Tim Bastian

 

 

[Author]

Posts