Invoice Factoring in Reverse?
Discussion
Sorry if the thread title is confusing. I'm looking for any insightful opinions on a situation at work.
Our largest customer is trying to push us to accept payment via a third party, what I understand to be factoring.
We have used factoring in the past, particularly for chasing bad debt prior to writing them off.
As the recipient of payment, we are being offered earlier payments with discounts, ie standard terms are nett 30 days, but we can take payment next day or within 14 days in return for a discount. We can also elect to remain at nett 30 days and receive full payment.
We have no intention of taking early payment in return for discount, we do not have any need or requirement to do this.
I'm trying to understand why our customer would want to move payment to suppliers to one of the worlds biggest financial companies. Is it effectively an outsourcing of a chunk of their accounts department for zero or minimal cost?
Before somebody does tell me, ask your customer, we have done. The people we deal with (purchasing dept) are not privy to (or just don't know), the reasons. They are trying to push/bully us into this scheme.
The stronger they push, the more suspicious I become.
My current position is that we have traded for almost two decades without any issues either way, I see no reason to change anything.
Our largest customer is trying to push us to accept payment via a third party, what I understand to be factoring.
We have used factoring in the past, particularly for chasing bad debt prior to writing them off.
As the recipient of payment, we are being offered earlier payments with discounts, ie standard terms are nett 30 days, but we can take payment next day or within 14 days in return for a discount. We can also elect to remain at nett 30 days and receive full payment.
We have no intention of taking early payment in return for discount, we do not have any need or requirement to do this.
I'm trying to understand why our customer would want to move payment to suppliers to one of the worlds biggest financial companies. Is it effectively an outsourcing of a chunk of their accounts department for zero or minimal cost?
Before somebody does tell me, ask your customer, we have done. The people we deal with (purchasing dept) are not privy to (or just don't know), the reasons. They are trying to push/bully us into this scheme.
The stronger they push, the more suspicious I become.
My current position is that we have traded for almost two decades without any issues either way, I see no reason to change anything.
Igurisu said:
Before somebody does tell me, ask your customer, we have done. The people we deal with (purchasing dept) are not privy to (or just don't know), the reasons. They are trying to push/bully us into this scheme.
They would only push/bully you into the scheme if there was something in it for them. I would push back harder, they do know, they're just not telling you.However, on a wider point, as a creditor I don't particularly care who pays me as long as the money is in the bank when it should be. We deal with lots of businesses and the names on the cheques don't always tie up with the debtors. Why do you need to agree to being paid by a third party, surely they could just pay you anyway? If it was BACS or FP, you'd never know exactly what bank account had paid you.
I would guess the finance company in the middle is acting as an overdraft facility. They will take a chunk of the discount. Say you take up the option of giving a 5% discount for instant payment. Your customer only gets a 2.5% discount from the finance company and the finance company gets the other 2.5%. It's just another mechanism for avoiding cash flow issues.
It isn't factoring.
The type of arrangement they're proposing has been around for a few years now (lots of banks offer it) and relies on suppliers deciding to sell their invoices to an intermediary BUT has a very different risk profile for the finance provider.
Are you able to say which financial institution it is? Some don't have any fees/charges if you don't sell invoices but do include forecasting tools and the such like.
The type of arrangement they're proposing has been around for a few years now (lots of banks offer it) and relies on suppliers deciding to sell their invoices to an intermediary BUT has a very different risk profile for the finance provider.
Are you able to say which financial institution it is? Some don't have any fees/charges if you don't sell invoices but do include forecasting tools and the such like.
They're presumably getting this from Santander (they're the only UK Bank I've seen doing this as an integrated product)
They tried to sell it to a client of mine last year as part of a finance package. We didn't complete with them in the end but from what I understand, from a borrowers perspective it self funds as the settlement discount they (try to) negotiate pays for the facility. From the banks side it gives them clarity that suppliers are being paid and therefore the other facilities they're providing are more secure - it doesn't outsource the a/c payable team, just adds another layer.
Personally, I can't see how it fully stacks up and makes a decent return for them - I've been in the finance game for a good few years now and it took me quite sometime to get my head around it!
They tried to sell it to a client of mine last year as part of a finance package. We didn't complete with them in the end but from what I understand, from a borrowers perspective it self funds as the settlement discount they (try to) negotiate pays for the facility. From the banks side it gives them clarity that suppliers are being paid and therefore the other facilities they're providing are more secure - it doesn't outsource the a/c payable team, just adds another layer.
Personally, I can't see how it fully stacks up and makes a decent return for them - I've been in the finance game for a good few years now and it took me quite sometime to get my head around it!
Edited by sleepezy on Wednesday 22 January 20:53
I'd rather not mention any bank or company names, but it's not Santander. My guess is that our customer has taken a major finance package with the bank and this is some way for them to reduce the cost/charges. We've declined to join again, a little stronger this time. I'll have to wait and see how hard they push.
Many thanks for the replies.
Many thanks for the replies.
There are lots more doing it than just Santander (pretty much all the main banks in fact) and all of them have multiple programmes.
I've seen a few of these and the better programmes don't actually end up costing suppliers anything if they don't sell invoices but still deliver some useful stuff.
They're distinct from other finance packages but do often end up being delivered by one of the banks with whom there is a pre-existing relationship.
Has your customer not given you anyone at the bank to have a chat to about it?
I've seen a few of these and the better programmes don't actually end up costing suppliers anything if they don't sell invoices but still deliver some useful stuff.
They're distinct from other finance packages but do often end up being delivered by one of the banks with whom there is a pre-existing relationship.
Has your customer not given you anyone at the bank to have a chat to about it?
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