If you will keep records of your customer payment performance you will be able to target those where the need for chasing is most acute. Unfortunately, there are debtors who will pay in a timely manner and those who will try to ‘steal’ as much additional credit as they can. So you do not have to wait them to pay, because they are waiting for your call. Just chase them! Also there are people who can’t pay because of lacking money. Your task now is to identify these as quickly as possible to minimize the risk of a bad debt. Remember, factoring companies are geared up to do this.
It is possible to find when a business is experiencing cash flow problems if you will keep records of payment performance. Experienced credit controllers for monitoring trends are employed by factoring companies. If you will be aware of a potential bad debt you will have the chance to minimize the risk.
Your cash flow will ultimately benefit with appropriate and professional credit control services in place to control your customer’s payment performance. But this is not all that factoring offers also the possibility of bad debt protection if it is required. Basically there are three elements to factoring:
a) Service element – the provision of sales ledger maintenance and credit control functions – that includes maintenance of the sales ledger, the sending out of regular statements of account to your customers and the follow-up of overdue invoices. Cash received should be correctly allocated to invoices paid and any short-payments followed-up liaising with the client where necessary to resolve any customer disputes or queries that may arise. b) Finance element - the provision of an initial payment against invoices as they are received by the factor from its clients providing an opportunity of up to 85% of the value of the each invoice.
c) Bad debt protection – in addition to the above bad debt protection can be offered based on credit limits set by the factoring company to further protect its clients from the possibility of non-payment of invoices. That’s why it is important to trade within these limits for avoiding the risk of bad debt through the failure of your customer.
Besides, there are two types of factoring: recourse factoring and non-recourse factoring. If the customer fails to make payment to the factoring company the debt is reassigned back to their client who is responsible for reimbursing the factor. And this will be recourse factoring. But non-recourse factoring is where the facility includes bad debt protection. And consequently, the debt is not re-assigned to the client should the customer go bankrupt.
The selection of a suitable factoring company is very important to any business looking for a factoring opportunity. Generally, factoring companies differ in the types of service offered and industry preferences. When a small business has a prime debtor it is necessary to seek a factoring company who understands that and does not put heavy limitation on your facility as a result of this prime debtor. The services of a factoring broker can be beneficial to an enterprise seeking assistance in finding a suitable factoring facility.
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