How FACTORING fetched more profits for my company!

Challenges for a Founder

Employees who were very strong in technical or functional background and those who successfully dealt with clients will face different challenges once they turn into a Founder

The most important challenges are:

  • dealing with cash flow
  • payments from clients
  • scaling up to accommodate new resources
  • getting loans from banks
  • choosing the right client

Operational lifecycle

A usual operational lifecycle of a project goes as

  • initiating a new project
  • executing it
  • getting sign off from the customer
  • raising invoices
  • Repeating the above steps considering the volume.

Crucial for a business

As an ex -employee and having better exposure, you will be able to take responsibilities on all the above steps until the next crucial step collections – getting the cash into your accounts which you do not have any control over.

During this process or even after the completion, you might need more cash for various things like resource recruitment, resource salaries, software licenses, managing infrastructure etc. for those 60 -90 days. (Some of the clients operate on net 60 or even net 90 for payments.)

Alternative for Payment delays

So how can you manage the situation, what options you have till the clients pay you and most importantly what are their downsides?!

  • Get loans /overdraft from banks.
    • lengthy process,  initial deposits, collaterals, pheww!
  • Get cash from friends/families.
    • you cannot ask them every time.
  • Put your own money.
    • you won’t be reading till this line , if you have enough money

You have just a plain paper called invoice and no other assets! And you don’t want to continuously borrow from your friends/ families. So what can be done?

Factoring

You don’t know that the plain invoice in your hand can save you. It is tradeable.  There are companies who can buy your invoice. But you need to pay a commission for them in return.  We call them Factoring companies or Factor.

Assume a company X wants a software product and comes to Y. Y completes the project and raise invoice to X. X will be paying only after 90 days. Now Y is need of cash so it sells the invoice to F. F give 90% (approx) of invoice value to Y on that very same day.  After 90 days F gets the invoice amount from X. In the end it is a win-win situation for everyone.

Advantages of Factoring

  • Factoring will take days to get cash. Mostly in the same day. Loans will take weeks & months to get sanctioned
  • Factoring will make your client a debtor. Loans will make you as debtor
  • Factoring will assess your client financial records whereas in loans its assess your track records

Statistics of Factoring

Country No of companies Euro in millions
China 45 352879
Hong Kong 17 33425
India 10 3700

Source: FCI

Take a closer look on the Asian factoring turnover in 2015 given FCI report.

There are around 10 factoring companies in India which were doing a turnover of 3700 millions. Whereas 17 factoring companies in Hong Kong’s turnaround is 33425 million which is 903% more than India? And China’s turnaround is 9537.27% than India.

The lack of awareness about Factoring and its significant benefits is the major reason behind such low numbers. Additionally certain prerequisites like the requesting company’s turnover limits also play a role in influencing the business.

I would recommend any type of organization to approach factoring companies when in need as this is also an easy way to understand the credibility of the client and there is 50% chance of laying your hands right on the much needed cash.

A CA told me once “There is lots of difference between the Account receivables & Accounts received”.

So what is the difference? Simple! It is the cash you have in your hand versus the cash in accounts book. Even if you have little less in hand than more in books. Its worth to get quicker.

Upcoming weeks – There are many other things which falls under it namely online factoring, Confidential factoring, Domestic factoring, International Factoring, Invoice Discounting, Recourse Factoring, Non-Recourse Factoring, Collections, Export Factoring, Import Factoring, Export Invoice Discounting

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