Factoring is primarily for smaller businesses who don’t have the time or resource to chase up unpaid invoices and may have customers who don’t always pay on time. Factoring in Nigeria is provided by few specialist firms regulated by the CBN.
This is process that is yet to be fully developed in this country. Considering the low debt-collection efficiency prevailing in most organization(the size of receivables of most companies will prove this point), it becomes clearer that an effective receivables management will enable companies presently faced with cash flow problems overcome their financial needs and thus have less reliance on bank borrowing which is often at high interest rates.
Factoring is a continuing arrangement by which the factor purchases all the trade debts due to a business as they arise, providing a sales ledger accounting service and thus relieving the businessman from the intricacies and sometimes unpleasantness of debt collection. In this way effective accounting of trade debts is achieved on the one hand and cash flow for operational needs is provided on the other. The factor may make an advance payment of 90% of the net invoice to the company at the time the invoice is raised, for a small financial charged. Otherwise, the factor could pay an agreed amount on a specified date, which will be more effective than the company’s usual debt collection system.
Factoring affords the following advantages:
- Production against bad debts- As a result of the wide experience gained by factors in different industries, coupled with their thorough credit control and administration systems, they are able to reduce the incidence of bad debts which otherwise would have paralysed many business
- Flexibility- The customer does not have to incur financial charges except where necessary. Incidences of financial charges has stifled the cash flow potential of some companies and eventually weakened their operations. If the business is seasonal, he can call for advance payments at that stage, thereby reducing financial charges.
- Efficiency- Since the factor normally agrees to a shorter collection period than that granted by the business itself, there is an efficient debt collection result which has the effect of improving the cash flow position of the factored companies.
Factoring is by no means cheap as the factored company has to pay for the credit control and accounting services it receives. However, with the advantages of good receivables management, a bank might even lend money on the basis of a property executed domiciliation of payments form.