Plastics : Factoring - Financing your commercial transactions -

A factoring company is a financial institution that buys  unpaid invoices at a discount, providing immediate cash to the business and taking over the responsibility of collecting payment from customers.

What is factoring:

• The supplier makes a sale and issues an invoice to customer
• The supplier submits the invoice to the factoring company
• The factor verifies the invoice and customer creditworthiness
• The factor immediately advances money (usually 70-90% of the invoice value) to the supplier
• The customer pays the full invoice amount to the factor when the payment is due
• The factor pays the supplier the remaining balance minus fees

How it works in plastics:

Process flow of factoring:

• Plastic goods are shipped to the customer
• Invoice is sent to the factor
• Immediate payment is received
• The factor collects from customer the balance after taking their fee from the payment, then pay the supplier

Common uses of factoring:

• Raw material purchases
• Machine payments
• Operating expenses
• Growth opportunities
• Cash flow management

Benefits of factoring:

Immediate Advantages:

• Immediate access  to quick cash flow
• No debt on balance sheet
• No collateral needed
• The customer credit is checked
• Professional collections of balance

Business usage of factoring:

• To buy materials in bulk
• To take larger orders
• To meet payroll easily
• To grow faster by injecting money into the company
• To have better supplier terms

Cost structure:

Typical fees:

• Factor fee (1-3%)
• Processing fees
• Wire transfer fees
• Credit check fees
• Documentation, contracts and setup charges

Cost considerations:

• Invoice size
• Customer credit quality checking
• Payment terms
• Volume of business
• Relationship length and trust

Risk management:

Key checks:

• Customer credit worthiness
• Clear documentation
• Clean invoices
• Delivery confirmation of the goods
• Payment history of the customer

Common Issues:

• Customer disputes ober goods
• Payment delays
• Documentation problems or inconsistencies
• Quality claims 
• Credit issues

Example of factoring:

Plastic company scenario:

• The supplier sells $100,000 of plastic pellets
• The customer payment terms are : 60 days
• The company needs cash for new raw materials

Factoring process:

• The factor advances 80% ($80,000) immediately
• After 60 days, the customer pays $100,000
• The factor deducts 2% fee ($2,000)
• The supplier receives the balance ($18,000) 

Result:

• Immediate access to $80,000 immediately
• The balance received later is $18,000 
• The total cost is : $2,000 (2%)

Specialty factors companies:

• Bibby Financial Services
• Liquid Capital
• Gulf Finance
• Summit Financial Resources
• LSQ Funding