Considering business rescue? Here’s how factoring can help

Considering business rescue? Here’s how factoring can help


Optimising financial expenditure in SMEs  Businesses may find themselves in financial distress for several reasons. Of course, in some cases there are fundamental failures, which cannot be rectified. In many others, however, it is the culmination of several unfortunate circumstances. With the right support, these businesses can get back on the road to success. This is especially evident in turbulent economic times. While there are positive signs for economic growth, there have been fluctuations within and between industries. Simply failing to react quickly enough to surges and dips in demand may land a business in hot water – seemingly with no way out – despite having a solid foundation. This is where business rescue comes in.

What is business rescue, and who can apply?

Business rescue is well established in many parts of the world – especially the USA – and is on the rise globally. Its introduction to South African legislation, in Chapter 6 of the Companies Act, is more recent, and it is not widely understood. In short, business rescue aims to help a company that is in financial distress reorganise itself, thus returning it to profitability. This includes restructuring the business, negotiating repayments with creditors, and a moratorium on legal or liquidation proceedings against the company in question.

To qualify for business rescue, a company must demonstrate that either:

  • It will likely be unable to pay all its debts in the next six months (commercial insolvency); or
  • It will likely become insolvent in the next six months (factual insolvency)

This process must be overseen by an accredited business rescue practitioner. Once appointed, the practitioner must formulate a plan – showing that there is a reasonable chance of recovery – before supervising its implementation.

Business rescue finance: the role of factoring

An important element of this process is securing business rescue financing: cash must keep flowing into the business to fund any necessary changes and ensure operations and sales continue. Once business rescue proceedings have been commenced, this may be secured through a reputable financier. The timeline for business rescue makes this an urgent matter. The viability of business rescue must be declared within 10 days of the practitioner’s appointment, and the plan published within 25 days.

Factoring offers a solution to rapidly unlock working capital. With factoring, the business sells its debtor’s book, i.e. accounts receivable to a third-party organisation – giving them 75% of the total balance up-front, and the remainder, minus agreed upon fees, once the account is paid by their client. This provides a much-needed cash injection, allowing the business to boost sales, increase margins and thus repair its credit score. Another benefit is that, with cash on-hand, the business can negotiate discounted bulk deals with suppliers. All-in-all, factoring can play a pivotal role in financing recovery.

Why choose Merchant Factors?

Founded in 1988, Merchant Factors has developed a wealth of expertise, and can provide a factoring facility specifically tailored to the business rescue process. It also has a horizontal organisation structure that grants decision-makers extensive insight into the needs of your business. This enables them to formulate and adjust your factoring facility throughout the process of business rescue, ensuring that you have fast access to working capital, every step of the way.

Over and above the factoring facility, Merchant Factors offers comprehensive support in administering your finances. It handles credit control and debtor administration services, including opening new debtors accounts, doing credit checks, sending reminder and final request letters if necessary, and even verifying delivery as an after-sales service. All of this lightens the load on the you, your team and the business rescue practitioner – so you can focus on building a stable and profitable business as quickly as possible. Once business rescue has been completed, you can also continue to partner with Merchant Factors – empowering a smooth transition into growth.

What your company needs to qualify:

Once business rescue has been commenced, the following is required of an organisation to qualify for factoring facilities from Merchant Factors:

  • Sell on credit terms not exceeding 120 days
  • Deal business-to-business only (i.e. no consumer debt lending)
  • Sell on an outright basis (i.e. not on consignment or "sale or return")
  • Have no sales involving contractual obligations that need to be performed at a future date, including retentions, progress payments, interim claims or draws.

For fast, flexible business finance – contact Merchant Factors today

Finance beyond the Numbers.