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Factoring and Leasing, the Pros & Cons

02-03-2020 | by Rowan Hermes | Ilfa Group

With factoring, outstanding invoices are sold to a factoring company. The factoring company transfers the outstanding amount immediately and then collects the bill with the customer. Leasing is best known for the financing of cars, but can be used for many more things. In general, when leasing, an object is borrowed for a fixed fee. In the case of a financial lease, you become the full owner of the property; in the case of an operational lease, the leasing company remains the owner until the full amount is paid.
There are advantages and disadvantages to each form of financing. In this blog the advantages and disadvantages of factoring and leasing are discussed.

Blog is in Dutch language:

De voordelen van factoring voor ondernemers

  1. Liquiditeit
    De factormaatschappij betaalt een groot deel van het te incasseren bedrag meteen uit. Ondernemers hebben dus niet langer het probleem dat debiteuren (te) laat betalen, maar kunnen meteen over het geld beschikken en dit weer investeren in de organisatie.
  2. Kapitaal
    Organisaties krijgen door middel van factoring meer kapitaal ter beschikking dan via een banklening. In de regel financieren banken zo’n 50 procent van de uitstaande rekeningen, terwijl het percentage van factoraars veel hoger ligt (70 tot 90 procent).

De nadelen van factoring voor ondernemers

  1. Privacy
    Een factormaatschappij neemt bijna de hele debiteurenadministratie over. Hiervoor hebben zij veel inzicht nodig in het financiële plaatje van de onderneming. Niet elke ondernemer voelt zich prettig bij het delen van onder andere jaarcijfers met een externe partij.
  1. Kosten
    De organisatie verliest een deel van de marge, een deel van de uitstaande rekeningen zal namelijk naar de factormaatschappij gaan als betaling voor de dienstverlening. Het overeengekomen percentage maakt factoring vaak net wat duurder dan een banklening.

De voordelen van leasing voor ondernemers

  1. Spreiding
    Leasing is gekoppeld aan het te financiering object. Per object (denk aan machines, auto’s of voorraad) kan een apart contract afgesloten worden, waardoor er meerdere financieringsbronnen ingezet kunnen worden. Daarnaast worden ook de kosten gespreid over een langere periode. Er is geen grote aanschafkostenpost, maar er moet maandelijks betaald worden. Om een nieuw object aan te schaffen hoeft dus niet lang gespaard te worden.
  1. Eigenaar
    In het geval van financial lease is de ondernemer meteen eigenaar van het te financieren object. Dit betekent dat er meteen geprofiteerd kan worden van de fiscale afschrijving en de investeringsaftrek. Bij operational lease ligt dit net iets anders, bij deze vorm van leasing blijft de leasemaatschappij eigenaar van het object totdat de laatste termijn betaald is.

De nadelen van leasing voor ondernemers

  1. Contract
    Leasing bestaat meestal uit een contract van meerdere jaren dat weinig flexibel is. Het tussentijds openbreken van een contract is vrijwel onmogelijk of erg duur. Dit kan inhouden dat er bij vervanging van een object betaald moet worden over het inmiddels vervangen object én de vervanging. Dit gebeurt bijvoorbeeld wanneer een geleasede machine tijdens de contractduur kapot gaat en vervangen wordt. Hoewel de kapotte machine niet langer gebruikt wordt, moet er nog wel voor betaald worden.
  1. Kosten
    Het leasen van een object is duurder dan het object meteen kopen. Ondernemers betalen de leasemaatschappij om de betaling van de aanschafprijs te mogen spreiden.

 

Source

Factoring – Unlocking the (hidden) potential of your working capital

31-1-2020 | by Ron Wessels 

Do you also wait for your customers to pay you after a sale is closed? In today’s world it is getting more difficult to arrange cost efficient traditional bank financing and not everybody has sufficient cash reserves. If funding for you is tight, you can search for alternatives. Many suppliers of alternative funding are quite expensive and their business ethics are not always solid. Perhaps your working capital offers a better solution.

There is a way to convert your outstanding debtors into cash. This is called “Factoring”, offered by factoring companies.

How does Factoring work?

Depending on your existing AR (accounts receivable) portfolio an arrangement with a specialist factor provider can be made to sell those invoices on the date your issue them and get paid within a couple of days (mostly 2-3 days).

You receive most of the cash upfront but yet you are still in charge of the collection process and dunning (there are factoring companies that also offer credit collection services). You want to stay in control of the collection side as this is very important for your Customer Relation, e.g. you want to know if things are not going as they should be. You do not want to outsource the management of potential conflicts with your important clients. Your customers will pay into a bank account in your name but under custody of the factor provider. Obviously, you will have/need full insight on the activities on this bank account. Typically, you get funded about 90% of the face value of the invoice (ex.VAT) and the remainder minus costs, upon collection from the customer. The costs for factoring are depending on the size of your AR portfolio sold but vary around 1,5 to 4%, depending on aforementioned size (this is an estimate and have to be explored during an evaluation). This cost includes the credit insurance.
The factoring program can be tailored either on-balance or off-balance to optimize your accounting processes and your balance sheet strength. Factoring most of the times also requires a credit insurance for the outstanding accounts receivables. Both you as well as the factoring company want to mitigate the risk of clients who cannot pay.

Why is Factoring interesting?

Often factoring, including a credit insurance, is cheaper than traditional bank financing. Especially for companies with no or low credit rating. The factoring industry is more mature than many of the suppliers of alternative funding. This results in more stable processes and improvement of existing processes. Last but not least, the build-up of your balance sheet will be different resulting, amongst others, better financial ratios.

Is factoring difficult to implement?

Not necessarily, you need to agree on the terms and conditions with the factor, the credit insurance and it involves some legal advice/work. Furthermore, you need to agree with the factor on how to deliver the AR data (preferable automated) and the frequency of submission. As this is a mature industry, it is relatively easy to compare quotes of different factoring companies. Two further aspects are very relevant. The first is the quality of your existing processes. If your AR is a bit chaotic, it will be harder to implement the factoring services. Furthermore, the size and activity of your company is important. Small companies with a low number of deals will be treated differently by a factoring company. For example, a mobile telephone operator.

Conclusion

Factoring is a good alternative for traditional bank debt to finance your working capital. It will require up front work but once installed it is easy to maintain at a low cost. A quick scan of your existing AR outstanding can prove whether it is cost efficient to enter such program.

If you are looking for independent advice on factoring before reaching out to suppliers, please contact us. We are happy to help you.

 

 

 

 

Ron Wessels

Group Treasurer

 

Corporate Trade Finance Products: What is Factoring & Forfaiting

| 26 -11-2018 | by Nijay Gupta | treasuryXL |


In view of Credit & Geo-political Risk worldwide, the Corporates & Financers (mainly Bankers & Financial Institutions) are offering plenty of products to Sellers & buyers to enable them to do Trade.  The most sought after product  now a days is Factoring & Forfaiting for Domestic & International Trade.

What is Factoring & Forfaiting (Post shipment Finance)

Factoring: A sort of Financial arrangement between the Seller & Intermediary Bank, to sell its Accounts Recievable rights in favour of the Factor (intermediary bank) to collect/discount the proceeds of the bills/Invoices. A business will sometimes factor its receivable assets to meet its present and immediate  cash needs.

This may involve discounting of bill by the Factor Intermediary . Generally the discounting is done upto between 80 to 90% of the invoice value on Recourse basis. The factor charges, Collection, Administration, Management , Credit Protection & Financing (if done) cost to the Seller/exporter.  Generally, the Factor insist for Seller to have this arrangement for all their sales, which is generally not liked by the sellers/exporters, those are keen to give business only for the troubled countries/buyers with Geo-political & other problems. The Factor helps seller collection of Invoice proceeds thru all legal means through their world-wide branches/subsidiaries or correspondent banks network.

Forfaiting:  Forfaiting is a factoring/discounting arrangement used in Domestic/International Trade Finance by Sellers/Exporters who wish to sell their receivables  to a forfaiter (intermediary Bank, Financial Institution or a Finance Company) on without recourse basis.

This can be for short-term (1 month) to Long-term (10 years) Bills with or without LC on Without Recourse basis.  The Forfaiter collect its discounting fee upfront for the entire period and it is the best arrangement for the exporter and intermediary Forfaiter.  Its win-win for both, as exporters get the bill proceeds upfront (as all risks are passed on to the Forfaiter) on without recourse basis and gives good income upfront to the Forafaiter. Paying upfront interest to the Forfaiter is permissible  by RBI under FEMA 1999.

Many Foreign Banks in India are offering these products on aggressive basis, even to the exporters does not have account relationship with them, in order to earn comission, fee & Interest on Factoring & Forfaiting business for their buyer customers LC or without LC, in other countries. Interest Rates are at MCLR or Libor relates rates of interest with lower mark-up.  Infact, sometimes, its cheaper for the exporter to get Finance under these schemes cheaper than normal Interest rate charged by Banks to exporters under Pre-shipment or Post-shipment Finance schemes.

 

Nijay Gupta

Founder & CEO NK GUPTA Consulting