CARIBBEAN FINANCIAL SERVICES CORPORATION ACCOUNTS RECEIVABLE FACTORING

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Richard Wells
8 years ago
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1 CARIBBEAN FINANCIAL SERVICES CORPORATION ACCOUNTS RECEIVABLE FACTORING DEVELOPING A REGIONAL PROGRAMME FOR SMALL BUSINESSES

2 CONTENTS 2 Introduction Objective and Target Groups Definition of Accounts Receivable Factoring The Transaction Process Sample Transaction Benefits of Factoring to Small Businesses Risks to the Factor Factoring Process Proposed Development 2

Process Sample Transaction Benefits of Factoring to Small

3 INTRODUCTION As an institution focused on development finance in Barbados and the OECS, CFSC is interested in developing creative ways to assist small businesses. CFSC is introducing its Receivables Factoring Programme in an effort to address the cash flow difficulties facing small businesses. During this workshop, CFSC is seeking your input to ensure that a programme that will work will be developed. 3

CFSC is introducing its Receivables Factoring Programme in an effort to address the cash flow

facilitate steady cash flows for daily operations.

4 OBJECTIVE To provide small and medium sized enterprises (SMEs) in Barbados and the OECS with working capital support through the factoring of invoices to facilitate steady cash flows for daily operations. TARGET GROUPS Agriculture / livestock Agro-industries Manufacturing Tourism and related industries Services 4

5 ACCOUNTS RECEIVABLE FACTORING What is Factoring? Factoring is a financial transaction in which a company sells its accounts receivables in the form of outstanding invoices at a discount to a third party, i.e. a factor. The discount takes into consideration the risk that the receivables may be uncollectible from the debtor. The factor provides cash to the company and, with nonrecourse factoring, assumes the credit risk of the company s debtors. As the debtors settle their accounts, the factor seeks to collect the full value of the outstanding invoices. 5

a third party, i.e. a factor. The discount takes into consideration the risk that the receivables may be uncollectible from the debtor.

6 THE TRANSACTION PROCESS VENDOR 2) Sells receivables to Factor 3) Pays Vendor based on expected collections FACTOR 1) Sells products / services to Customer 4) Remits payment on invoice to Factor CUSTOMER 6

7 SAMPLE TRANSACTION ABC Trading sells pharmaceuticals to XYZ Pharmacy ABC Trading obtains approval from XYZ Pharmacy to factor its invoices; XYZ Pharmacy agrees to pay CFSC (the factor) the face value of the invoice within 30 days. ABC Trading delivers pharmaceutical drugs to XYZ Pharmacy along with its invoice totalling $10,000, copying the invoice to CFSC. XYZ Pharmacy immediately confirms to CFSC that the drugs have been received and have been accepted. CFSC discounts the invoice having assessed the level of risk involved and pays $9,400 to ABC Trading within 5 business days. ABC Trading can now pay its suppliers, purchase additional drugs, pay employees salaries and pay utility bills by the discount date. XYZ Pharmacy pays the face value of the invoice to CFSC within 30 days, and the transaction is settled. 7

XYZ Pharmacy immediately confirms to CFSC that the drugs have been received and have been accepted.

8 BENEFITS TO SMALL BUSINESS Cheaper source of working capital than traditional bank / financial institution lending Improved cash flow without incurring debt or diluting existing equity Eliminates collection concerns for the small business, whose resources are typically limited Daily operating expenses, suppliers can be paid on time Not only can bills be paid on time, but small business can now take advantage of supplier and other cash discounts 8

the small business, whose resources are typically limited Daily operating expenses, suppliers can be paid on

9 BENEFITS TO SMALL BUSINESS (cont d) Provision of working capital for replenishing or increasing inventory / raw materials Production can be increased when demand increases Credit terms can be extended to buyers Credit history of vendor is generally less critical than that of the buyer (but must still be considered) Traditional means of financing may become available with ability to show stronger cash position 9

extended to buyers Credit history of vendor is generally less critical than that of the buyer (but must

10 RISKS TO THE FACTOR Buyer may pay late or not at all MITIGANTS Adequate due diligence must be performed on buyers; certain criteria must be met (includes terms for collection) Appropriate discount assists in addressing risk Fraud MITIGANTS Adequate due diligence on both buyer and small business Appropriate documentation Appropriate segregation of duties for application processing 10

discount assists in addressing risk Fraud MITIGANTS Adequate due diligence on both buyer and

11 RISKS TO THE FACTOR (cont d) Foreign exchange risk MITIGANT Remittance of payment in the same currency as the invoice paid to the factor Business Failure and Settlement Disputes MITIGANT Business credit insurance Formal dispute resolution / arbitration process 11

the factor Business Failure and Settlement Disputes MITIGANT

12 FACTORING PROCESS Application form is completed by small business A nominal application fee is paid to CFSC to cover administrative costs The small business customers provide written confirmation to CFSC of agreement to pay CFSC directly Initially, it may take up to three to four weeks of due diligence to receive CFSC approval to factor a business invoices However, payment on invoices should take fewer than seven business days once invoices are verified 12

CFSC directly Initially, it may take up to three to four weeks of due diligence to receive CFSC approval to factor

13 FACTORING PROCESS (cont d) The discount rate on the invoices factored will vary based on the overall risk associated with the industry, the buyer and the quality of the receivables The small business can factor selected invoices Minimum and maximum volume limits will be established 13

buyer and the quality of the receivables The small business can factor

14 PROPOSED DEVELOPMENT Introduction of CFSC s Factoring Programme to the Market Discuss factoring process with strategic partners Solicit feedback and recommendations from relevant parties Discuss other related financing avenues Third party support may be engaged to provide technical assistance Setting up further workshops Programme development, including legal documentation (contracts) Training for programme execution Research similar programmes to determine best practices 14

support may be engaged to provide technical assistance Setting up further workshops Programme development, including

15 JNJ CAPITAL RESOURCES UNLOCK YOUR CASH FLOW THANK YOU

Simply put, factoring is a transaction where a company sells its invoices at a discount in exchange for quick funds.

Simply put, factoring is a transaction where a company sells its invoices at a discount in exchange for quick funds. Imagine your growing business just made a six-figure sale to a company across the country. The problem? The buyer has 60 days to pay, but your cash flow is limited, meaning you can t afford the immediate