FAQs

Merchant Factors

So who are we?

To most people, financial institutions are cumbersome and often bureaucratic organisations that only seem to be able to lend money to businesses that don't really have a need for it. That's really where we are different.

We are a totally independent finance house that specialises in providing businesses with effective working capital solutions when they need it. We're not talking about traditional overdraft type facilities that are so inflexible, they are more of a hindrance than a help. Our business is to keep you in the business of generating profit by employing out of the box thinking.

Most banks fail to realise that each one of their clients have differing needs at various points in the life cycle of their business. At Merchant Factors we recognise that streamlined cash flow is often the difference between a loss and a profit. To this end we offer bouquets of creative financial solutions, ranging from factoring to stock and bridging finance to help you grow your business to the next level, smoothly and efficiently.

What is factoring?

Even though South African businesses factor over R25 billion in turnover each year, the concept is still relatively foreign to many business owners. It's by far one of the most effective ways that a business can unlock funds tied up in its debtor's book.

Most businesses that trade with other businesses sell their products or services on credit. This means that for a period of thirty days all the way up to four months, no cash is coming into the business. For a rapidly expanding or SME organisation, those terms can be crippling and cash flow becomes an increasingly elusive commodity.

Factoring gives the business the ability to draw cash back into the business before the customer pays. Up to 75% of the value of an invoice can be paid by Merchant Factors on presentation of the POD, with the balance being paid as soon as the customer settles the account in full.

Of course, a major challenge with any debtor's book lies in the actual administration and collection process. Merchant Factors take over the administration of your sales ledger and trained professionals provide customer credit checks, credit control and efficient debtor administration.

What are the costs associated with factoring?

Merchant Factors charges an administration fee plus a discount or interest rate which is agreed with your business upfront depending on how the service is structured, the volumes of invoices and the overall credit worthiness of the customer base:

  • The interest rate ranges from between 2.0% and 3.0% above the prime lending rate on funds that have been advanced until the invoice is settled by your customers.
  • The administrative fee ranges from 0.5% to 2.5%

Won't these administrative charges and interest rates erode my margins further?

Aside from the obvious benefits of releasing cash tied up in the debtor's book earlier, many of our clients' off-set the cost of factoring by:

  • taking settlement discounts from their suppliers,
  • paying creditors cash on delivery and negotiating as much as a 5.0% discount on purchases.

Why choose factoring?

The easing of cash flow constraints has many obvious benefits for any business:

  • Cash for expansion: Remember that finance advanced through factoring is based on sales already invoiced. This means that the more you sell, the higher the amount available to your business, meaning you can keep up with the demands of expansion.
  • Increased sales: How many times have you said that if only the cash flow was better, you could invest in new product lines or increase stock levels? More stock means faster delivery and more orders that you probably would have had to turn down before. Factoring gives you that ability.
  • Increase margins and improve credit rating: It stands to reason that every business wants to do more business with companies that pay their bills on time. Better cash flow means more negotiating power with suppliers. Bulk settlement discounts reduce the overall cost of goods to the business, margins improve and the savings may even cover the costs of the factoring.
  • Saved time and resources: If you've got our professional debtor administration team taking care of your accounts, it means your senior staff spend less time dealing with collections and more time generating new business. Less overheads are expended on managing debtors meaning the bottom line consistently improves.
  • Minimizing potential bad debt: Merchant Factors' analysis of delinquent debtors will help you to prevent losses and bad debts, as well as facilitating the early identification of high risk debtors.
  • Improved return on capital: We all love what we do but let's not forget the real reason you are in business; to generate a profit. Effective factoring really does translate into an improved return on capital following from the ability to sustain higher levels of trading on your existing capital base.
  • Expansion without loss of equity/control: There's really nothing worse than building up your business and having to let go of equity unnecessarily. Factoring means you can grow without diluting ownership. Grow what you have without losing what you've built.

I've got a pretty close relationship with my customers. How will they react when Merchant Factors starts dealing with them?

Many clients feel that having a buffer between them and the sensitive issue of collections is advantageous. Generally you will have an improved standing with suppliers and customers and the professional way in which we handle credit control will reflect well on your business.

Won't my customers think that my business is in trouble when they discover that I'm factoring my debtor's book?

As we discussed earlier when we explained factoring, over R25 billion in turnover is factored by South African businesses each year. It can be a sign of a rapidly expanding business rather than one that is in financial trouble. Our professional staff will assist you in explaining our involvement to your customers.

Exactly how do your professional staff interact with my customers?

We pride ourselves on having leading credit control professionals on our team. They quickly develop relationships with your customers ensuring efficient collection of monies owed. For most businesses, credit control, debtors administration and credit checks are a time consuming headache. Our dedicated credit controllers administer your sales ledger with absolute commitment, on your behalf.

OK but if your staff are managing my credit control, how will I know what's going on in my business?

Of course our service doesn't mean you'll have lost control. On the contrary, our 24/7 online system means you are always kept well informed of all transactions by means of clear, comprehensive sales and related management information. Probably better than you've ever had before.

Tell me more about the debtor's administration services you provide?

When you team up with Merchant Factors, it's like having an entire accounts and credit control department working for you. We take care of:

  • Opening of new debtors' accounts
  • Checking the completion of the credit application form
  • Performing the necessary credit checks
  • Assessing credit limits by means of reference to the credit reports obtained through Experian (previously known as Kredit Inform), ITC and our own database
  • Sending reminder letters and final demands where necessary and as guided by our clients
  • Verifying deliveries as an after sales service
  • Banking receipts and allocating payments made according to remittance advices received from debtors
  • Assisting in settling of disputed accounts and liaising with attorneys when accounts are handed over. This is done in consultation with the clients, all costs relating hereto being for the account of the client.

I wish I'd heard about Merchant Factors before i ceded my debtors to my bankers as security for my other facilities. Is there some way I can still use factoring?

This is a common issue amongst our first time factoring clients. Fortunately, the traditional banks are so risk averse, they probably only placed a value of 30% on your debtors book. Merchant Factors advance you up to 80%, meaning you've pretty much got up to 50% more than from your bank. We will settle the bank facility from your factoring proceeds and you can start to enjoy the benefits of factoring to help your business realise its true potential.

Is it possible to try it out without committing all of my debtors?

You don't have to factor all of your debtors. You could choose the ones that either put pressure on your cash flow or the ones where you see the biggest growth potential. Whilst you may choose which debtors to factor, you are of course then obliged to factor all the invoices for that particular customer. This avoids accounting inaccuracies and inconsistencies.

Bank loans generally run over years, what are your contract periods? Can I use factoring on an ad hoc basis?

Firstly, due to the nature of factoring, ad hoc arrangements aren't really suitable. Our contractual periods run for 6 to 12 months.

The other financial institutions I've dealt with needed collateral before granting credit facilities. How does Merchant Factor's do it?

  • We are secured financiers and our collateral requirements are similar to traditional banks:
  • Cession of debtors
  • Surety by the shareholders/members
  • General bond over the assets of the business
  • Basically we look to the assets of the business to secure the transaction.

Ok, I'm interested. What are the criteria to qualify for factoring?

It's really simple actually. Do you:

  • sell on credit terms not exceeding 120 days?
  • deal exclusively business to business (not with individual consumers or sole traders)?
  • sell on an outright basis (not on consignment)?
  • have sales without complex future contractual obligations (not sales with retentions, progress payments, interim claims, draws etc.)?
  • have a turnover in excess of R120,000 per month or have good prospects to grow should you extend credit terms to customers?

If you answered yes to the above questions, you're already halfway there.