- 07 Mar
Is Debt Factoring A Type Of Outsourcing
Debt factoring delivers a number of key services.
This is support from a factoring company's (or factor's) credit control team to assist or fully manage the process of collecting in payments from your customers. The extent to which this is a fully comprehensive outsourced service depends upon the provider that you select, and hence the modus operandi that they adopt. In some cases, they can offer "confidential factoring" whereby everything is conducted in the name of your company, and using your own branding. This could be considered a "white labelled credit control process".
With some providers, particularly the independent factors, they will offer you a fully comprehensive service whereby you will not need to retain credit controllers in-house, or handle the process yourself. This could be considered a fully outsourced service - and in some cases, because specialist staff are used, it can help improved your debt turn (the time customers take to pay your invoices), improving your cash flow. On the other hand, some offer a less comprehensive approach that may, or may not suit your needs. It may be that they only chase the largest customers on your sales ledger, or that they rely on automated chasing for some customers. This approach may require you to still undertake some of the work in-house - a partially outsourced service.
Funding Against Unpaid Invoices
The factor will normally provide you with what is called a "prepayment" against your unpaid sales invoices. This can be c. 85% (more in some cases) paid to you when you raise the invoice, so that you don't have to wait until your customer pays in order to access any of the money tied up in that invoice. If you have a whole sales ledger of outstanding invoices you may be able to raise quite a large cash injection by factoring those invoices, and receiving prepayments against them.
Whilst this is part of a normal facility, this aspect would not really be considered a form of outsourcing.
Bad Debt Protection
The other common facet of these facilities is the provision of "bad debt protection" (BDP). This is often an optional extra, although you may be required to have BDP in some cases, if your situation warrants it. Again it's not really outsourcing but there are other optional extras that do fall under that description.
Other Outsourcing Options
Some factors will be able to provide you with Payroll Management. This is an outsourced service to handle your payroll and all the paperwork associated with it. Not all providers offer this option, but it can be particularly attractive to companies in, for example, the recruitment sector. They tend to have large staff payrolls to manage, and using a third party specialist can be a neat solution.
Within the construction sector, funders also tend to use Quantity Surveyors (QS), to look at the contracts that regulate the transactions that are being funded. In some cases, you can get access to free QS support, as part of the factoring package - another outsourced service that saves you having to pay for such help.
Is Debt Factoring A Type Of Outsourcing?
So the answer to the question "is debt factoring a type of outsourcing?", it that yes, it definitely has elements that are outsourced. However, there are other aspects that are just beneficial services e.g. funding and bad debt protection.
It is also worth making the point that your don't need to take out a factoring facility in order to access outsourced services such as credit control, and payroll management. Both can be provided independently, without the need to take funding against your invoices.