At a time when profits are still being squeezed by the effects of the last recession, the factoring of debt can offer companies considerable costs benefits over an in-house operation.
Optimum Finance can achieve direct savings for clients resulting from increased efficiency in sales ledger management and collections plus the protection afforded by up to 90 per cent protection against bad debts under a Factoring facility with Debtor Protection.
Under this system, companies assign their debts to Optimum Finance who are then responsible for sales ledger administration and the collection of payments.
If clients are concerned that this may damage their relationship with customers, our experience, backed by recent surveys of companies whose supplies utilise a Factoring service, proves that this is not the case. In fact, relations can be enhanced by the professionalism Optimum Finance brings to this most vital financial function.
Factoring can speed up payment from a UK average of 74 days to around 46 days, accordingly to the industry sector concerned.
This means that company borrowings diminish and more funds are immediately available for utilisation by the business.
Cash flow shortfalls are the largest single cause of business failure – so the intervention of a Factor can represent the difference between the success and failure of a company
Take as an example a company with a turnover of £1,200,000 that waits 74 days on average to receive payment. If the company agrees a Factoring arrangement with the addition of Debtor Protection, a projected improvement of 28 days in the collection period will result in a further £92,055 of working capital each year, cash which was previously tied up in the sales ledger.
In addition, assuming bad debts comprise 2.5% of turnover, the Debtor Protection with 90% cover will yield an extra £27,000 to the company which would otherwise be lost.
With Factoring, a £27,000 reduction in costs of bad debts, added to savings of £5,671 in interest charges afforded by earlier collections, against administration savings and Factoring costs, overall costs would reduce by an estimated £38,271.
These savings of £32,822 together with the additional £92,055 of working capital, would produce a total of £124,877 of additional funds.
The analysis in the case of the example given is as follows : –
Company Turnover £1,200,000
Collection Period 74 days
Live Accounts 90
Assumed Base Rate 0.50%
Assumed Overdraft Rate Base + 3.00%
POTENTIAL AREAS OF SAVINGS FOR THE COMPANY RESULTING FROM FACTORING PLUS DEBTOR PROTECTION
Cost of statements/reminders/machine time/postage = £6,000
Credit control/bookkeeper overhead: 50% of time @ £18,000 p.a. + 45% overheads = £11,700
Legal costs for collections = £3,600
Status Enquiries on new customers: 20 new customers at £25 per customer = £500
Assumes bad debt total 2.5% of T/O pa @ 90% = £27,000
Saving in interest charges, due to reduction in average collection period from 74-46 days = £3,222
ANTICIPATED SAVINGS – £52,022
Cost of Factoring incl. Debtor Protection (1.6% of 1.2 million) = £19,200