What factors are Factoring and Invoice Discounting companies looking for, when they are deciding if the applicant is suitable for a facility?

What factors are Factoring and Invoice Discounting companies looking for, when they are deciding if the applicant is suitable for a facility?

The invoice discounter will first check the business by carrying out a mini audit if the firms customers and accounts systems.

After the audit has been passed the invoice discounting company set up a facility which provides a draw down facility to gain access to percentage of the total sale each month.

The below are areas the provider will be looking at as part of deciding whether to offer a factoring or invoice discounting facility to an applicant business or company:

Advance Billing

An Invoice raised legitimately by a company in the normal course of business in advance of the provision of the service to which it pertains (also see Deposits and Pre-Invoicing).

Pro Forma Invoices are a form of Advance Billing, generally for goods rather than services, and generally for the purpose of obtaining payment up front. Some examples would be: Rent Storage, Hire Charges Maintenance Charges.

Factoring Companies Typical Concerns: Whilst the Invoice may be in accord with the terms and conditions or the requirements of the Customer, and may, in fact get paid, at the date of invoicing, there is no debt. The debt arises as the service is performed (or once the goods have been delivered in the case of a Pro Forma) which may well extend over a long period. The notification of such an Invoice to a Factoring or Invoice Discounting Company would expose the Factor to prepaying (funding the invoice) against a future debt. The Factoring Companies view being; if their Client ceased trading before completing the service (or delivering the goods) the debt would not be collectable, or, if already paid, may be offset against other debts.
Identification: This type of invoicing system can be identified by the Factoring or Invoice Discounting Company through a review of the Orders, Contracts, and Invoices: the nature of the business will also predicate its likelihood. The Factoring Company would likely ask questions like, Does your business invoice in advance for any of your services? Or, Do you ever raise Pro Forma invoices?
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies class Invoices of this type should not be notified to them, or if found, should be reserved against. If the major part of the business is found to consist of Advance Billings then it is not suitable for Factoring or Invoice Discounting.

If your business has a high incidence of Advance Billing we may be able to help through other specialist financing options.

Factoring Agent

Someone who acts on behalf of another in a selling capacity without taking title to the goods or services.

Factoring Companies Typical Concerns: Effectively, this is where the Client acts as Agent, the Supplier remains as Principal in the Contract with the Customer, and the Client, therefore, never gains clean title to the goods. This, therefore, precludes the ability of the Client to assign the debts to a Factoring or Invoice Discounting Company.
Identification: Factoring and Invoice Discounting Companies review the Supplier Terms and Conditions of Sale and any Contracts, which exist. They would look for the terms Commission or Agent, and review Supplier Invoices for references to the end Customer.
Action A Factoring Company May Wish To Take: Normally under no circumstances would a Factoring or Invoice Discounting Company be involved in prepaying (funding) against debts arising from an Agency relationship.

Associated Companies or Staff Sales

Any sale made by the Client to any other company or individual with whom there is a relationship additional to that of vendor/vendee. Examples of these are: Parent Companies, Subsidiary Companies, Associate Companies, Companies with common Shareholders, Companies with common Directors, Franchisees Employees (Staff, Representatives, Directors, Shareholders) Other, Individuals (i.e. Non-commercial sales).

Factoring Companies Typical Concerns: Factoring and Invoice Discounting Companies would consider any sale made to such a company or individual cannot be considered an arms-length transaction and collection could prove difficult in say a liquidation situation. They would also take the view that the potential for Fraud through collusion is greatly increased, and in the case of individuals, there is no satisfactory way of ensuring either independence or creditworthiness. Furthermore, Factoring and Invoice Discounting Companies consider things like; with a Franchisor/Franchisee relationship, the demise of the former will inevitably bring down the latter i.e. the debt would remain unpaid.
Identification: Factoring and Invoice Discounting Companies would want a list of all known Associated Companies (in its widest sense) normally this is requested during the set-up or sales process. The Factoring and or Invoice Discounting Company would normally question the Client, reviewing the Aged Debt Analysis, and by reference to a Companies House Search. This information would then be checked on a going basis.
Action A Factoring Company May Wish To Take : Normally Sales of this nature might well be excluded by Factoring and Invoice Discounting Companies from the Agreement form the outset, however, if identified later in the relationship, the outstanding balances will typically be reserved against immediately, and exclusion arranged subsequently.

Where the odd sale to an individual is made, this requirement may well be waived on the grounds of materiality, but Factoring and Invoice Discounting Companies will be monitoring.

Back-Ups

Copies of Clients Sales Ledger Records, both manual and computerised, maintained in such a way as to provide a source of replication in the event of destruction of the original. Copies of Clients Sales Ledger Records, both manual and computerised, maintained in such a way as to provide a source of replication in the event of destruction of the original.

Factoring Companies Typical Concerns: In the event of destruction of the Clients records, Factoring or Invoice Discounting Company would be unable to determine the detail behind the value pre-paid to the Client. Given that a destruction scenario is likely to result in substantial problems for the Client.
Identification: Factoring and Invoice Discounting Companies determine the Clients security procedures through such questions as; do you take security copies? How often are they taken and where are they kept?
Action A Factoring Company May Wish To Take: Factoring and Invoice Discounting clients must be encouraged to adopt adequate security measures to ensure their ability to re-create the detail of their sales ledger. This must include weekly back-ups housed either in a fireproof safe or off-site, where computerised, or the sales ledger system, e.g. Ledger cards, should be kept in a fireproof safe at the end of each day, where manual.

Ban on Assignment

A clause within a Debtors Terms of Purchase or Contract, which specifically bans the assignment of the benefits or proceeds of the sale or Contract. Often referred to in abbreviated form as BOA.

Factoring Companies Typical Concerns: The Contract is in place before the debt arises, and, therefore, will override the Clients legal right to assign the debt to the Factoring and Invoice Discounting Company, and negate the right of the Factoring or Invoice Discounting Company to the proceeds of the debt.
Identification: Factoring and Invoice Discounting Companies will want to review customers Terms of Purchase or Contracts and, if in any doubt, they will refer them to their legal teams for guidance. Examples have been seen which specifically ban assignment of invoices (debts) to Factoring and Invoice Discounting Companies, but these are rare. Look out, however, for all references to benefits or proceeds.
Action A Factoring Company May Wish To Take: Where an effective BOA exists most Factoring and Invoice Discounting Companies take the view that all the debts due from that Customer should be reserved, and the Debtor excluded from the Factoring or Invoice Discounting Agreement at the earliest opportunity.

Alternatively, a waiver from the Customer can be obtained, although this obviously involves disclosure, and may not be practical. Where the assignment is disclosed and payments are received direct by the Factoring and Invoice Discounting Company then the BOA clause is unlikely to be enforceable at a later date due to normal course of trading.

Ban On Assignment is becoming an ever increasing problem however strategies can be implemented to get Factoring and Invoice Discounting Companies comfortable. Please contact us for a free assessment.

Bills of Exchange

A documentary instrument of payment whereby the payer undertakes to pay a fixed sum on a set date to the payee. It is always held by the payee for presentation to the appropriate Bank for payment. It is not a guarantee of payment, funds must be available at the payer Bank. Often abbreviated to BOE

Factoring Companies Typical Concerns: BOEs are a useful improvement on open account trading in that they provide a fixed date for payment and provide a useful basis for collection through the courts in the event of non-payment. The concern is that Bills of Exchange can be discounted through a traditional Discount House, to obtain payment prior to maturity, and this would negate the Factoring or Invoice Discounting Companies right to payment.
Identification: These are common in certain industries, such as yarn suppliers, and Factoring or Invoice Discounting Companies are watching for Bills of Exchange accordingly. Factoring or Invoice Discounting Companies frequently just ask questions like, do any of your customers pay by Bills Of Exchange to identify the issue.
Action A Factoring Company May Wish To Take: Bills Of Exchange should be endorsed over the Factoring or Invoice Discounting Company immediately received in order to prevent those amounts being double discounted.

Clients may wish to continue discounting their Bills (the rates are generally much finer than the Factoring or Invoice Discounting Company) in which case the associated debt must be entirely excluded from the Factoring or Invoice Discounting Company Agreement.

Capital Items/Installation

Generally items of large value from which purchasers would derive use for a period greater than one year (as opposed to Consumables or Expendables). These may involve an element of Installation by the Client, and may be financed by a third party e.g. a Hire Purchase or Leasing Company.

Factoring Companies Typical Concerns: By their very nature, Factoring or Invoice Discounting Companies typically take the view that Capital Items tend to be large value; therefore a single dispute will also be of significance. Items of this nature are also likely to be the subject of Deposits and Guarantees. Where Installation forms part of the order then the invoice for the actual goods may be separate, and raised on delivery. Payment may only be enforceable after Installation – if the Client say went down before this, then collection may prove impossible Factoring or Invoice Discounting Companies, or at least subject to offset of damages (this is a form of Partial Billing).
Identification: The nature of the product will determine the likely value the Factoring or Invoice Discounting Companies will offer for each individual order (and therefore if it is a Capital Item). The possibility of Installation will be determined again by the nature of the product, but also by the Factoring or Invoice Discounting Company view of Invoices and Orders.
Action A Factoring Company May Wish To Take: Capital Items are not generally suitable for Factoring or Invoice Discounting Companies, primarily because of the incidence of associated problems. Where Installation is a feature, then invoices should not be notified until the work is fully completed, Factoring or Invoice Discounting Companies will often require this evidenced by a Satisfaction Note, Letter of Acceptance or other proof of completion.

If this is an issue for your business we can help with other specialist forms of finance.

Cash Sales

A sale made on the basis of delivery after or on receipt of payment. Also known as Cash on Delivery terms (C.O.D.).

Factoring Companies Typical Concerns: A proper Cash Sale does not give rise to a debt and, therefore, cannot be assigned to a Factoring or Invoice Discounting Company. However, many Clients post Invoices to a Cash Sales or C.O.D. account which are simply on very short terms (14 days, 7 days) and this may give rise to a balance outstanding at the month end. The usual reason for such sales is the doubtful creditworthiness of the Customer.
Identification: Usually identifiable on an Aged Debt Analysis by the title of the account but can also be picked up from a review of Invoices (where these show the terms).
Action A Factoring Company May Wish To Take: Cash Sales should not be notified by the Client to the Factoring or Invoice Discounting Company.

Common Debtors

These are Debtors which feature on both a Notified ledger and on a Non-Notified ledger. This may be for a separate division, a different product, or for Customers on different terms to normal e.g. C.O.D.

Factoring Companies Typical Concerns: The reasons for the Non-Notified ledger may be of a concern to Factoring or Invoice Discounting Companies is that they take the view that it may conceal Disputes, Extended Terms, Sale or Return or Cash Sales (where customers cannot pay off the outstanding balance on the Notified ledger). A further problem is that of Split Cheques whereby the Customer is paying both a notified debt and a non-notified debt with one cheque. This results in either banking or the Factoring or Invoice Discounting Companies money by the Client, or visa-versa.
Identification: Factoring or Invoice Discounting Companies frequently ask their clients questions like; do you run any other Sales Ledgers? Factoring or Invoice Discounting Companies sometimes compare the Turnover shown in Management Accounts with the notified sales statistics: if there is a discrepancy (other than VAT) then request details of how the figures are compiled (they may have deferred or accrued income). As a by-product of this comparison, the incidence of fraudulent sales may be picked up. The Management Accounts may be accurate i.e. Not including the fraudulent sales. Also Factoring or Invoice Discounting Companies frequently review the calculation of the VAT returns; this may also reveal additional sources of sales that they where unaware of.
Action A Factoring Company May Wish To Take: Where it is established that Common Debtors exist for legitimate reasons then the Client must bank all split cheques to the Factoring or Invoice Discounting Companies account, and notify the Factoring or Invoice Discounting Company accordingly. A refund can then be made of the value relating to non-notified debts.

Any Common Debtors set up in the Factoring or Invoice Discounting Companys view for unacceptable reasons may require a reserve, exclusion, or even a recommendation for termination of the Factoring or Invoice Discounting agreement.

Concentration

Any debtor balance, which represents a significant proportion of the total debts outstanding.

Factoring Companies Typical Concerns: Factoring or Invoice Discounting Companies often take the view a dispute on a Concentration debtor account can cause a serious cash flow problem for a Client. The loss of a Concentration debtor account, whether through insolvency or to the competition, will also have a major impact on the trading performance of the Client.

Furthermore, Factoring or Invoice Discounting Companies adopt the view that the risk of Fraud through collusion is also enhanced where the values involved make a very close relationship between Client and Customer is likely. In many respects, the view that the fewer the Debtors, the easier to collect out in the event of Client failure should make the Factoring or Invoice Discounting Company feel more comfortable; however, they always bear in mind the potential for loss given even one dispute or failure. Where the Debtor is vital i.e. the percentage of debt to total debt is greater than the retention percentage, this concern is even greater.

Identification: For Factoring or Invoice Discounting Companies the percentage of debt to total debt is calculated for the top debtors on the month end aged debt analysis. It should always be noted that this only paints the month end picture which may well be immediately after the monthly payment and may not reveal the full potential exposure.
Action A Factoring Company May Wish To Take: Most Factoring or Invoice Discounting Companies current procedures require that where a Concentration exists greater than 30%, a reserve should be set up to restrict the value (for prepayment purposes) to the 30% ceiling.

Additionally, some Factoring or Invoice Discounting Companies insist where two debts together represent more than 60%, then a reserve to bring each individual debt down to 25% should be set up. Factoring or Invoice Discounting Companies debt validation and POD checks would then centred on these debts, and all Orders and Contracts would be reviewed where available. Factoring or Invoice Discounting Companies would need to be entirely satisfied as to the validity of these debts.

Alternatively, just select a Factoring or Invoice Discounting Company that operate without Concentration restrictions.

Constructive Delivery

This is where a Client holds goods for which the Customer has already been invoiced i.e. they have not been delivered. This may be at the request of the Customer, or simply a device by the Client to obtain early payment from them (or from the Factoring or Invoice Discounting Company). This is also known as Bill and Hold.

Factoring Companies Typical Concerns: In the event of the demise of the Client, the Customer would be entitled to withhold payment until delivery of the goods had been effected: this delivery could not be assured in every scenario and therefore, payment could also not be guaranteed to the Factoring or Invoice Discounting Company.
Identification: Factoring or Invoice Discounting frequently ask questions like; do you hold any goods for which you have already invoiced. Factoring or Invoice Discounting Companies sometimes look around the premises for finished products and identify the Customer and stage of invoicing for them. Factoring or Invoice Discounting Companies also carry out the Shipping (POD) Test to identify invoices for which no delivery has yet been made. (This may be Pre-Invoicing, not Constructive Delivery).
Action A Factoring Company May Wish To Take: Ideally the goods must be clearly identified, segregated, recorded in some form of register, and subject to written confirmation that they are held at the Customers request. In the absence of these controls Factoring or Invoice Discounting Companies often take the view that the full value of the debt relating to the goods held should be reserved.

Contractual Sales

Sales, which are made according to a formal written Contract. This will be signed by both parties to the Contract i.e. The Client and the Customer.

Factoring Companies Typical Concerns: There are a number of concerns to the Factoring or Invoice Discounting Companies, which can arise in a Contract:

– A Long Term Contract may give rise to Stage Invoicing
– Fixed Price Contract may prove onerous to the Client at a later date
– There may be a Ban On Assignment clause
– There may be Penalty Clauses for non-fulfilment

These would normally involve claims for damages, or at least a reduction in the amounts due under the Contract. Also known as Liquidated Damages clauses, they may also give the Customer the right to have the work completed elsewhere at the expense of the Client. Non-fulfilment may include lateness of delivery.

Identification: Factoring or Invoice Discounting Companies frequently ask questions like; are they any Contracts in place with your Customers? Contracts are likely where the items are of large value, or of a long-term nature, however, they may occur anywhere. Factoring or Invoice Discounting Companies may wish to review Orders and Invoices, which may refer to a Contract Number.
Action A Factoring Company May Wish To Take: Copies of the Contracts with the major Customers are usually obtained and reviewed by Factoring or Invoice Discounting Company. Where any of the above concerns feature, and they prove to be onerous Penalty Clauses, or a Ban On Assignment, the debt may have to be fully reserved or excluded from the Factoring or Invoice Discounting Agreement.

Specialist contract financing is available but it is very depend upon the types of contracts.

Credit Insurance

An insurance policy that covers the Client against Customer bad debts. This may include cover on Work-in-Progress, Exports, and Protracted Default (non-payment after a set period).

Factoring Companies Typical Concerns: The Factoring or Invoice Discounting Company may rely on the cover limits provided by the insurer to set their own credit limits; without an assignment of the policy, this is difficult for the Factoring or Invoice Discounting Company to police, and may give rise to exposures on Debtors on which the insurer has dropped the limit due to adverse information. Where the Factoring or Invoice Discounting Company comfort is gained from such a policy, the adherence of the Client to its terms and conditions requires monitoring by the Factoring or Invoice Discounting Company. This can also prove difficult for the Factoring or Invoice Discounting Company.
Identification: Factoring or Invoice Discounting Company usually ask Prospects or Clients; do you have any insurance against bad debts?
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies frequently ask for a copy policy for review. The Factoring or Invoice Discounting Company may want to check that Payment of premiums and adherence to any other terms and conditions are administered correctly and will ask to monitor. Credit limit lists and endorsement documents would be regularly reviewed be the Factoring or Invoice Discounting Company to ensure that the Client has notified the Factoring or Invoice Discounting Company of any changes, particularly dropped limits if they are relying on the Credit Insurance policy.

Crown Right of Set-off

Crown Agencies have a legal right to set-off monies due to them such as VAT, PAYE/NI and Corporation Tax, against monies owed by them. Crown Agencies include: Government Ministries e.g. MOD Property Services Agency (PSA) HMSO Government Departments e.g. DHSS, HM Revenue & Customs

Factoring Companies Typical Concerns: In a collect out situation, the Factoring or Invoice Discounting Companies fear any debts due from Government Agencies may be reduced by the amounts outstanding for VAT, PAYE/NI, and Corporation Tax.
Identification: The Factoring or Invoice Discounting Companies review Prospects and Clients Sales Ledger listings for any Government Agencies and obtain details of the outstanding VAT, PAYE/NI and Corporation Tax liabilities.
Action A Factoring Company May Wish To Take: Where exposures are significant the Factoring or Invoice Discounting Company reserve to the value of the debt (or the debt excluded) for maximum security. The Crown is frequently enforcing their rights for collection.

Deposits

Any monies taken from Customers by the Client in advance of the work being carried out. This amount may be for part, or all, of the job. Otherwise known as Advance Payments or Prepayments (also Advance Billings).

Factoring Companies Typical Concerns: Where the amount received in advance is for the whole job then no debt will arise at any time, even if the invoice is raised on completion. Where there is only a partial payment up front, then the balance of monies due will become a debt on completion.

Where this is invoiced in full, less the Advance Payment, then this would, in theory, be a factorable debt that could be accepted by Factoring or Invoice Discounting Companies. However, there is an additional concern that Factoring or Invoice Discounting Companies will have with these types of payment, should the Client cease to exist, there is likely to be a mix of completed invoices outstanding, together with Deposits received for future work on many of the Customers. Factoring or Invoice Discounting Companies often take the view that this is certain to result in set-offs being applied against what would otherwise be valid debts.

Identification: Factoring and Invoice Discounting Companies will want to review the Cash Book, Orders and Invoices, and ask the questions like; do any of your Customers pay up front, or provide Deposits against future work?

Factoring or Invoice Discounting Companies will sometimes ask to review the Nominal Ledger for any Deposits Received accounts (Deposits are not always specific to jobs, and are not always handled within the Sales Ledger). The type of industry should give some indication to the Factoring or Invoice Discounting Companies of the likelihood of such payments.

Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies often take the view that the full value of Deposits held should be reserved; however, a Client or Prospect with high levels of these is generally unsuitable for factoring.

Dilution

The amount (or percentage) by which any debt (or debtor book) has or needs to be written down in order for the reduced value to represent the collectable value a Factoring or Invoice Discounting Company can rely on.

Factoring Companies Typical Concerns: At any given time the Debtor Book against which the Factoring or Invoice Discounting Company is prepaying will contain an element that will be subject to Credit Notes or Adjustments, rather than payment in a gone situation The levels of Dilution will determine the Factoring or Invoice Discounting Company’s ability to collect out their indebtedness.
Identification: Factoring and Invoice Discounting Companies Dilution can be identified through analysis of the historical Sales Ledger information. This is always carried out by the Factoring or Invoice Discounting Company at the survey stage of a relationship. Whilst this will give an indication of the likely levels, which may well be seasonal, it does not necessarily provide a true picture of the actual Dilution that would occur in the feature.

Factoring and Invoice Discounting Companies therefore believe it is essential that all potential forms of Dilution are identified and quantified up front before entering into a relationship. Dilutions can be evidenced by:

Discounts: where the Client gives Settlement Discount
Credit Notes: where the Client reduced the debt due from the Customer
Credit Adjustments: where the Client writes off part or all of a debt
Defective Goods
Poor Service
Right of Return (see Sale Or Return)
Accommodation (no legal right to return, but Client accepts to preserve good Customer relations)
Volume Allowances (see Retrospective Discount)
Advertising Allowances (see Promotional Contribution)
Short Delivery
Non Delivery
Overcharges (both through pricing and quantity errors)
Credit and Rebills (where the Client corrects an error immediately)
Fraud (to remove fresh-air invoices)
Bad Debts Transfers (from one account to another)
Write-offs (such as old balances or short payments)
Contras (see Two Way Trading)

To determine the reasons for the Credit Notes, Factoring or Invoice Discounting Companies will review the Credit Notes themselves, together with any supporting documentation usually at survey

Factoring or Invoice Discounting Companies also believe it is wise to review the months with the highest values. Factoring or Invoice Discounting Companies is also usually believe it necessary to determine the lag time between the raising of the Invoice and the issuance of the Credit Note. If there is a delay of more than 30 days then the future Dilution will be more than one months value e.g. Given an average lag time of 60 days, and Dilution of 10% of Sales, the total Dilution which will occur on the current debts will be 20% of Sales. A further way Factoring and Invoice Discounting Companies have of determining the likely future Dilution is to review the Returned Goods system. They review how quickly are the Credit Notes raised once goods are returned. The Client may also hold a Credit Note Pending file (also called Credits Awaited, Disputes, or Query files).

Action A Factoring Company May Wish To Take: Most Factoring and Invoice Discounting Companies take the view that the level of prepayment should be reduced to allow for the anticipated Dilution (generally in 5% steps, starting from 90% where levels are below 5%, e.g. 15% Dilution = 75% prepayment). If Factoring and Invoice Discounting Companies determine lag times are significant then the reduction would be adjusted accordingly e.g. If Dilution is 5% with average lag times of 90 days, the prepayment percentage would probably be 70%.

Where the value of Credit Notes not yet issued is significant, Factoring and Invoice Discounting Companies will reserve accordingly. Obviously, the reasons for the Dilution will have a bearing on the Factoring and Invoice Discounting Companies necessary action, e.g. where it is largely the result of Credit and Re-bills (with no time delay), the effect is minimal.

Direct Deliveries

Deliveries of goods direct from Supplier to Customer i.e. the Client does not handle the goods. Otherwise known as Drop Shipments.

Factoring Companies Typical Concerns: The Supplier is aware of the ultimate Customer and may attempt to obtain payment direct in the event of default by the Client. Their terms of sale may even contain the right to do so. Additionally, the Factoring and Invoice Discounting Companies may have to rely on the goodwill of the Supplier to obtain Proof of Delivery, and there is always the possibility that the Supplier is involved in Pre-Invoicing or Constructive Delivery. The Client may also be acting as Agent, not Principal.
Identification – Factoring and Invoice Discounting Companies will spend time understanding the invoicing cycle, specifically with the Purchases Manager, and review purchase invoices for place of delivery. Review copies of Sales and Purchases Agreements, Contracts, or Terms.
Action A Factoring Company May Wish To Take – Where a right of recourse exists from Supplier direct to Customer, or where the Client is acting as Agent, all the debts due from that Customer should usually be reserved by the Factoring or Invoice Discounting Company. Furthermore, it is typically for the Factoring or Invoice Discounting Company to exclude the debtor from the Factoring or Invoice Discounting Agreement at the earliest opportunity.

Double Headers

This is where one Client trades with another Client.

Factoring Companies Typical Concerns: Effectively the Factor is prepaying against the sale of a particular item twice: in the event of Dispute by the ultimate Debtor, this could be passed back from the second Client to the first Client, resulting in the amount being Disputed twice on the Factor. Where the Clients are aware of each other Factoring, there is also a potential for collusion and fraud.
Identification: Given that Auditors cannot be expected to know all the Factors Clients, extraction is a matter of luck, other than for debtors above the discretionary limits, for which checks are run on the Factors computer.
Action A Factoring Company May Wish To Take: Double Headers provide a perfect opportunity to validate the accuracy of both Clients records (Sale and Purchase), and of the operation of their invoicing. They should be monitored and reported in all cases for consideration of the double exposure by Sanction Authorities.

Exports

Any sale made to a Customer domiciled outside of the United Kingdom.

Factoring Companies Typical Concerns: Sales to non-UK Customers are not generally within the scope of the Invoice Discounting Agreement, unless specifically included. This is because, in the event of the demise of the Client, the Factoring or Invoice Discounting Company could potentially experience difficulty in obtaining payment, having to contend with foreign laws and practices. This may also prove a costly exercise.
Identification: Factoring or Invoice Discounting companies will review the Aged Debt Analysis and Statements for evidence of overseas companies (look for foreign names, addresses, 01 telephone numbers, or GMBH, SA,SVA suffices). They will ask the Client if they export, and if so, how do they account for the Debts? Factoring or Invoice Discounting Companies will review the Bank statements and Cashbook for evidence of foreign receipts (money transfers, currency conversions).
Action A Factoring Company May Wish To Take: Unless agreed in writing, these debts will probably be excluded from the notified ledger by the Factoring or Invoice Discounting Company.

Exports can often be covered through International Factoring or Invoice Discounting.

Extended Terms for Factoring

Sales on terms that allow the Customer to take more than the standard credit period.

Factoring Companies Typical Concerns: Where the Client produces a Due Date ageing, the period over which the Factoring or Invoice Discounting Company finances the debt can be excessive (and, therefore in the Factoring or Invoice Discounting companies view more risky (for example, an invoice on 90-day terms should be effectively financed for 195 days from notification (90 days before due, 90 days past due, and 15 days before submission of the Control Account).

Even where the Client submits an Invoice Date Ageing, whist the exposure is limited to a maximum of 105 days, the debt is far more likely to become ineligible, and may restrict the Clients cash flow.

Identification: The Factoring or Invoice Discounting Company will review the Clients terms as stated on individual Invoices, and ask the question; do you give any of your Customers non-standard terms of payment?
Action A Factoring Company May Wish To Take: It is the normal policy of a Factoring or Invoice Discounting Company to stipulate the accepted terms within the Factoring or Invoice Discounting Agreement, and to demand written approval before accepting extensions.

Extended Terms should therefore be reported to Factoring or Invoice Discounting Company where these have not been approved in writing beforehand.

Forward Dating

Any Invoice dated later than the delivery of the goods. The purpose would normally be to give the Customer longer credit without having to amend the standard term.

Factoring Companies Typical Concerns: If the Invoice is notified to the Factoring or Invoice Discounting Company when it is raised, as opposed to when it is dated, then the Client is effectively giving extended terms and thereby increasing the risk period without the Factoring or Invoice Discounting Companys knowledge or approval.
Identification: Factoring or Invoice Discounting Companies Shipping (POD) Test should reveal the discrepancy between delivery, invoice, and notification dates.
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies insist the Client must be made to notify invoices on the date that the stated credit period beings i.e. the date of the Invoice. However, this is common in some trades, and can be approved by the Factoring or Invoice Discounting Company for short periods (usually two months or less) on good debtors.

Free Issue Material

Any material, which is supplied by the Customer to the Client free of charge i.e. it will not feature in the Purchase Ledger nor be identified as Two-Way Trading. Often referred to in abbreviated form as FIM. This will also include goods provided for the purpose of a service to be performed e.g. material for dyeing or metal goods for coating.

Factoring Companies Typical Concerns: In the Factoring or Invoice Discounting Company’s view the demise of the Client whilst holding FIM belonging to a Customer may result in that Customer attempting to offset the value of those materials against the debt due to the Factoring or Invoice Discounting Company. Theoretically the unused materials could be returned to the Customer, but this cannot be guaranteed (in fact the Client may well have used them on other jobs).

In the case of the provision of a service to the Customers goods, of additional concern is the inability to prove that the service has been satisfactorily carried out (the POD check will only prove return of the goods). This inability gives rise to a high potential for disputes, particularly following the Clients demise. Factoring or Invoice Discounting Companies never assume that the level of credit notes reflects the inherent quality of the work undertaken, rectification of faulty work may well take place with no associated paperwork.

Identification: Factoring or Invoice Discounting Companies will discus with staff the source of materials for specific jobs a record may well be maintained of such materials by the Client. Factoring or Invoice Discounting Company’s ask questions like; do your customers supply any of the materials themselves?

FIM is particularly prevalent in the Printing Industry, and consider also Artwork, Moults, Tools and Components, not just Raw Materials. A Factoring or Invoice Discounting Companys review of customer orders may also reveal FIM e.g. material to be supplied. The nature of the service will also reveal the likelihood of customers providing goods to be worked on to the Factoring or Invoice Discounting Company.

Action A Factoring Company May Wish To Take: FIM should ideally be clearly labelled as the property of the Customer, segregated from other materials, and properly recorded and controlled through some form of register. Prospects with very high levels of FIM are not usually suitable for Factoring or Invoice Discounting.

Guarantees and Warranties

A Contractual obligation to replace, rectify, or refund goods that become faulty within a set period (anything from 14 days to a lifetime).

Factoring Companies Typical Concerns: Goods that are provided with a built-in Guarantee or Warranty may not be paid for by the Customer if the Client ceases to exist, and is therefore no longer in a position to honour its obligations. This is particularly dangerous to a Factoring or Invoice Discounting Company where the Customer is a Distributor, rather than an End-User, as the Distributor would not wish to on-sell goods for which they would have to honour any Guarantee (being unable to recourse it to the ceased Client).
Identification: Factoring or Invoice Discounting Companies will review Client Terms and Conditions of Sale, Sales Literature and Catalogues. Factoring or Invoice Discounting Companies will ask the question Do you offer any Guarantee or Warranty with your products?
Action A Factoring Company May Wish To Take: Where the Client is a Distributor, they will usually offer the Guarantee on the back of the Manufacturers Guarantee (and on the same terms). This is not a problem generally by Factoring or Invoice Discounting Companies. Where the Client is a Manufacturer, and the Customer a Distributor, then the provision of a lengthy Guarantee should preclude the inclusion of the associated debts from the Factoring or Invoice Discounting Agreement.

Factoring or Invoice Discounting companies consideration maybe given, to the nature of the product (the simpler the product the less the concern e.g. a guarantee on jewellery would be of far less concern than on watches). Where the Client is a Manufacturer, and the Customer an End-User, then the quality and reliability record of the products would be investigated by the Factoring or Invoice Discounting Company. Where this proves to be good, then inclusion may be possible, however, where this proves to be poor, then the debts would probably be excluded by the Factoring or Invoice Discounting Company.

Letters of Credit & Invoice Financing

This is an instrument commonly used by overseas Suppliers to obtain a guarantee of payment from the Client. It will be raised by the Client and drawn on their bank, effectively utilising a part of their pre-arranged overall facility.

Factoring Companies Typical Concerns: Whilst the Letter of Credit itself is not a concern, it is the potential title to the goods (and the proceeds of sale thereof) that may be in question, particularly where the documents are released to the Client (entitling them to the proceeds) under a Trust Receipts for example. The Client may not be in a position to pass good title to the debts on to the Factoring or Invoice Discounting Company.
Identification: Where the Client purchases goods from abroad the Factoring or Invoice Discounting Company will establish the method of payment. If this is by Letter of Credit then they will investigate the facility

Which bank
What are the terms
Are Trust Receipts used

Factoring or Invoice Discounting Companies will review the terms, and any copy Trust Receipts for evidence of title being held by the Supplier, or the Bank. The Factoring or Invoice Discounting Company bear in mind the likelihood of Invoices being notified to the Factoring or Invoice Discounting Company, prior to payment (maturity) of the Letter of Credit.

Action A Factoring Company May Wish To Take: Where the values are significant and the terms prevent good title passing to the Factoring or Invoice Discounting Company, then a reserve will be set up.

Partial Billing

Invoicing for goods delivered under an Order or Contract, which requires further deliveries before being fulfilled. This can be in respect of services part performed, and is also known as Stage Invoicing, Stage Payments, or Progress Billing (also see Scheduled Orders).

Factoring Companies Typical Concerns: If the Order or Contract is not entirely fulfilled, then it may be considered void, and payment, therefore, not due. In the event of Client failure, a Factoring or Invoice Discounting Company would not generally wish to be involved in having to complete the Order or Contract themselves, and may not be in a position to ensure that this occurs (for instance, under a Receiver). There may also be a potential claim for Liquidated Damages (See under Contractual Sales).
Identification: Debts of this nature can be determined by the Factoring or Invoice Discounting Company reviewing Orders and Invoices and through an understanding of the nature of the business. This type of invoicing is prevalent in the Construction Industry but may also occur where there are large values, long production time items.
Action A Factoring Company May Wish To Take: Where Partial Billings occur, the terms of purchase (Order or Contract) may contain a divisibility clause (also known as a cut-off clause i.e. each delivery empowers invoicing and payment. Even with such a clause in place, an assessment of the likelihood of the Customer not requiring the goods so far delivered must be made by the Factoring or Invoice Discounting Company. This assessment must consider the ability of the Customer to go elsewhere and the usability of the items invoices e.g. bicycle frames delivered, wheels to follow. Where it is felt that the goods are of little value until the whole Order is fulfilled, then a reserve will usually be applied by the Factoring or Invoice Discounting Company up to the value of those particular invoices.

Where it is considered by the Factoring or Invoice Discounting Company that the Customer needs the goods, could not quickly source them elsewhere, and that the goods are complete (in finished form), then no reserve would normally be necessary.

Pre-Invoicing

Any Invoice, which is raised before delivery of goods or completion of services (but see also Deposits, Partial Billing, and Advance Billing). These will be raised either to obtain early payment from the Customer, or simply to obtain early payment from the Factoring or Invoice Discounting Company.

Factoring Companies Typical Concerns: Whatever the reason for Pre-Invoicing, where the Invoices are notified immediately, the effect is that availability is generated within the Factoring or Invoice Discounting account against uncollectable debts. This is a material breach of the Factoring or Invoice Discounting Agreement, and could be regarded as Fraudulent.
Identification: Factoring or Invoice Discounting Companies frequently use the Shipping (POD) Test to reveal the incidence of Pre-Invoicing. This is extended to current debt, when identified, to quantify the current exposure.
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies acknowledge some Client systems operate in such a way as to evidence Pre-Invoicing by a few days on each invoices, this is usually acceptable where a delay in notification to the Factoring or Invoice Discounting Company is built into counter this. Where there are examples of longer delays, then a Factoring or Invoice Discounting Company reserve is usually calculated on the basis of the current exposure.

Prior Lien

A right to first call on the goods or proceeds of sale of the goods to the value of amounts owing to the holder of the goods. Typical Prior Lien Holders are Warehousemen, Carriers, and Agents.

Factoring Companies Typical Concerns: The nature of a Prior Lien is that the amounts due to the Lien Holder may be recovered from the sale, or proceeds of sale, of the goods that they hold. In the case of Carriers in particular, the Client may well have invoiced those goods, and the Factoring or Invoice Discounting Company may well be prepaying against them. It is also feasible that a Warehouse or Agent may hold the goods invoiced by the Client for onward delivery.
Identification: Factoring or Invoice Discounting Companies will review delivery procedures checking for instance are any goods delivered through third parties such as Warehousemen, Carriers or Agents? If so, how much is due to them at any one time? Factoring or Invoice Discounting Companies will Bear in mind that whatever is due now is likely to increase significantly towards the end of a Clients life.
Action A Factoring Company May Wish To Take: If the amounts due to The Lien Holders are significant in relation to the value of the goods in transit, or the accounts are significantly overdue, then the Factoring or Invoice Discounting Company is likely to reserve the value of these amounts. Alternatively, where the transit period is significant, the Client should notify the debt only once delivered to the Customer.

Product Liability Insurance

Insurance against any liability in the form of damages or compensation arising from, or in connection with, the Clients products or services e.g. sickness as a result of eating contaminated food, or injury as a result of faulty equipment.

Factoring Companies Typical Concerns: Claims for compensation are fairly common, particularly in the Food Industry, and whilst giving rise to a dispute on the debt, may also give rise to a substantial claim, which could bring down the Client. In this event the Product Liability Insurance may be the Factoring or Invoice Discounting Companies only hope of getting paid.
Identification: Review the Clients Insurance Policy and establish its adequacy (£1M is considered the minimum cover required). Review the Clients, or Prospects quality control procedures, and ask about any claims that may be in progress or foreseen.
Action A Factoring Company May Wish To Take: As above, establish the adequacy of the cover, and ensure that the policy is kept up to date. Where the cover is inadequate, the Client must be asked to increase it.

Promotional Allowances

An allowance or contribution made by a Client to its Customer for the purposes of advertising or promoting their products. It can be made by way of cash or credit note, and is usually a finite sum not a percentage.

Factoring Companies Typical Concerns: The Customer may retain the value of the allowance from their payment or factored Invoices and may well have the legal right of off-set in the event of the Clients demise.
Identification: The Factoring or Invoice Discounting Company will review the Cashbook for payments to Customers, and review Credit Notes for large or round sum values. Factoring or Invoice Discounting Companies will ask the questions like; are you asked to contribute to your Customers costs of promotion or advertising of your products? This is quite coming in certain sectors.

Action A Factoring Company May Wish To Take: If of significant value, then the Factoring or Invoice Discounting Company may well set up a reserve. The Factoring or Invoice Discounting will take into consideration that the allowance will probably be linked to issue of a catalogue on a seasonal frequency.

Reservation of Title

A clause contained in the Terms and Conditions of Sale (or Contract) which reserves the vendor title to the goods until payment is received. This may include the right to the proceeds of the sale of the goods. Also called Reservation Of Property or Retention Of Title, and abbreviated to ROT or ROP.

Factoring Companies Typical Concerns: Where the Client has not paid for goods, and has not, therefore, obtained title to them, there may be no ability to assign the debt (proceeds of sale) to a Factoring or Invoice Discounting Company.
Identification: The Factoring or Invoice Discounting Company will review the Supplier Terms and Conditions of Sale, and look out for such terms as proceeds of sale, bailee, and benefit or in trust. ROT is prevalent in the Paper, Steel and DIY Industries, but frequently occurs elsewhere.
Action A Factoring Company May Wish To Take: Legal opinion varies on the effectiveness of ROT Clauses, and it seems that the courts are disinclined to enforce them as far as the debts. However, an ROT clause is more likely to succeed where the goods concerned are sold on by the Client in their original form, and where they are readily identifiable and, therefore, traceable e.g. motor vehicle chassis with unique numbers. If the Factoring or Invoice Discounting Company expresses a concern, a waiver may be sought from the Supplier; alternatively a reserve to the value of the resultant debt could be set-up by the Factoring or Invoice Discounting Company.

Retention’s & Factoring

Any amount, which the Customer can rightfully withhold from the initial payment. This may be Retention for ensuring the quality of the work, such as in the Construction Industry, or as required by law, where the Client supplies Contract labour without producing a 714C or 714P certificate. The former are generally 5% or 10%, and are payable up to a year after the original invoice; the latter are always for the prevailing basic rate of Income Tax (currently 25%), and will never be paid.

Factoring Companies Typical Concerns: Effectively, the collectable value of the Invoice is diluted by the amount of the Retention.
Identification: Retentions are prevalent in the Construction Industry and all Industries associated with it, and can be picked up be the Factoring or Invoice Discounting Company through a review of the Remittance Advices, and of the Sales Ledger Open Items. The tax deduction occurs only in the Contract Labour Industry.

Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Company Prepayments could be reduced by the percentage of the prevailing Retention where these are rife. Where only evident on a few Customers then these can be controlled through Factoring or Invoice Discounting Company reserves. Factoring or Invoice Discounting Clients in the Contract Labour Business are usually encouraged to obtain 714C or 714P Certificates.

Retrospective Discount

Any discount which is given (or offered) subsequent to the raising of the invoice, or invoices, to which it relates. There are two main types:

Settlement Discount, which is a discount offered for prompt payment
Volume Discount, which is given once certain turnovers, or volumes, have been achieved (also known as Overrider Discount).

Factoring Companies Typical Concerns: Any Discount which is not already reflected in the net invoiced value will result in a dilution of the collectable value of that invoice, and, therefore, in the Factoring or Invoice Discounting Companies security. Settlement Discount is rarely of high value, and is generally actioned promptly by its very nature.

Volume Discounts, however, are often accumulated to be paid (or credited) to the Customer on a quarterly, half-yearly, or even an annual basis. These represent a far higher potential dilution at certain times of the year i.e. just before payment, and may even exceed the outstanding debt.

Identification: Settlement Discount will generally show on the face of any invoice e.g. deduct 2.5% if paid by 14th June, or within the Clients Terms and Conditions. Amounts deducted from payments may be shown in the Cash Book, or in the Cash Postings/Allocation Listings. Volume Discounts will be contained in special agreements with the larger Customers, and are generally negotiated once a year. The values can be calculated on that basis. Settlement can be spotted by Factoring or Invoice Discounting Companies through the Cash Book (if paid by cheque), or by them reviewing the Credit Notes.
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies consider no reserve is generally required for Settlement Discounts, although where values are high, the Prepayment Percentage may be adjusted. However, the prompt notification to the Factoring or Invoice Discounting Company of the values deducted will be monitored by the Factoring or Invoice Discounting Company. The value of accumulated Volume Discounts is usually reserved in full, as it builds up, until payment is made. Factoring or Invoice Discounting Companies always are aware that whilst not necessarily reaching the required monthly volumes, a sudden surge may trigger the Discount, resulting in a payment liability.

Sale or Return

A sale made whereby the Client guarantees to take back any goods that the Customer does not sell. This guarantee can be in writing (on the Customer Purchase Order, Sales Catalogue, or other Contract), verbal, or simply industry practice. Often referred to in abbreviated form as SOR.

Factoring Companies Typical Concerns: SOR invoices are not enforceable, as Customers have the right to return some or all of the goods at any time or within a stipulated period. They would then be entitled to a Credit or Refund.
Identification: Review Orders, Invoices, Catalogues, Terms and Conditions, and Credit Notes. SOR is common in the Toy, Greeting Card and Music Industry.
Action A Factoring Company May Wish To Take: SOR invoices should always be reserved in full. Prospects where SOR is prevalent are not suitable for Factoring: where it exists on selected Debtors, these should be excluded from the Factoring Agreement.

Samples

Goods, which are provided to the Customer in order to demonstrate their quality or saleability for the purposes of generating future sales. Also known as Sale On Approval and very similar to Sale or Return.

Factoring Companies Typical Concerns: Where these are provided free of charge, there is no concern, however, if invoiced on delivery, and where the Client ceases to exist, the Samples effectively become useless in terms of obtaining future sales, and the debt would therefore be considered uncollectable by Factoring or Invoice Discounting Company.
Identification: Factoring or Invoice Discounting will review Invoices, and understand the nature of the business e.g. demonstration kitchens are often installed at distributors, and wallpaper sample books are often charged.
Action A Factoring Company May Wish To Take: Any invoices for Samples or for goods sold on Approval are usually reserved in full by the Factoring or Invoice Discounting Company.

Scheduled Orders

Any order, which specifies more than one delivery, spread over a period of time. A variation of this is the Blanket Order, which will not specify the delivery dates, or even, in some cases, the quantity of goods required. In the latter case, there are likely to be Call-Offs in the form of sub-orders specifying quantities and delivery dates.

Factoring Companies Typical Concerns: These types of order are usually accompanied by thorough Terms and Conditions of Purchase. They may contain clauses which provide for damages in the event of late or non-delivery. In the event of the Client incurring these penalties, particularly where they cease trading, then the outstanding debt notified to the Factoring or Invoice Discounting Company may well be subject to offset (also see Partial Billing).
Identification: Factoring or Invoice Discounting Companies will review the Orders for evidence of these as well as Call-Off or Sub-Order rather than the Blanket Order (these should, have reference to the original order). The nature of the trade will also predicate the likelihood of such Orders. They are common, for instance, in the rag trade, the electronics industry, and in components.
Action A Factoring Company May Wish To Take: Where there are no Terms & Conditions of Purchase then no action is normally necessary by the Factoring or Invoice Discounting Company. Although, a form of cut-off or divisibility clause is advisable within the Clients Terms and Conditions of Sale.

Self-Billing for Invoice Discounting

Where the Customer raises its own Invoice for supplies made to it, and does not acknowledge any other invoice.

Factoring Companies Typical Concerns: The invoices raised by Clients (and notified to the Factoring or Invoice Discounting Company) will not be acknowledged by the Self Billing Customer, who will raise invoices based on their own records (these may not be in accord). It is essential that the Client thoroughly and regularly carries out a reconciliation of the account to ensure that the account does not get out of line. There may also be a high incidence of debit notes, which need to be actioned as Credit Notes in the Clients records.
Identification: Self-Billing is common in certain areas (Mail Order, DIY) and should be picked up from a review of Orders and Remittance Advices by the Factoring or Invoice Discounting Company.
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies will want to ensure that the reconciliation is up to date, that Debit Notes are promptly actioned as Credit Notes, and those payments are properly allocated. Properly controlled, Self Billed accounts are more secure for the Factoring or Invoice Discounting Company as the Customer is effectively acknowledging the debt, but Factoring or Invoice Discounting Companies are ware that this is only as he sees it, and he will not pay any difference arising on the Clients ledger.

Service Charges

A charge made for interest on an overdue debt, generally in accordance with the Clients Terms and Conditions of Sale.

Factoring Companies Typical Concerns: Whilst these charges may be legitimate, they are being levied on a defaulting Customer and relate to an already overdue debt. They are also very rarely paid.
Identification: A Factoring or Invoice Discounting Company review of the Aged Debt Analysis and Invoices should pick up these charges. Factoring or Invoice Discounting Companies will look also at the Clients Terms and Conditions of Sale and Service Charges are a feature. Factoring or Invoice Discounting Companies will typically ask the question; Do you actually levy these charges?
Action A Factoring Company May Wish To Take: Factoring or Invoice Discounting Companies will usually hold a reserve in full against this type of invoicing (they will normally be aged as current initially, not as per the overdue Invoices to which they relate).

Sundry Sales

A charge for anything other than the normal product or service of the Client. Also called Miscellaneous Sales, these could consist of:

– Sales of Fixed Assets (vehicles, plant, fixtures & fitting etc)
– Management Charges
– Rent (and other property associated costs)
– Default Charges (cancellation of Order, or breach of Contract)
– Storage Charges

Factoring Companies Typical Concerns: These would normally fall outside the scope of a Factoring or Invoice Discounting Agreement and may be subject to non-standard terms and conditions. Default charges are likely to be disputed, and could prove difficult to collect. Rent and Storage Charges are often billed in advance.
Identification: A Factoring or Invoice Discounting Companies review of Invoices should reveal sales of an exceptional nature, particularly where these are material.
Action A Factoring Company May Wish To Take : Sales of this nature should not be notified; where they have been, then a Factoring or Invoice Discounting Companies reserve would normally be set up for the outstanding value.

Tooling Invoices

Invoices for any items (Tools), which are designed to enable production of finished goods. They can be raised on completion of the Tool, as part of Stage Invoicing, or on the final invoice for the whole production job. Examples of tooling are Moulds, Dies, Artwork, Jigs and Patterns

Factoring Companies Typical Concerns: Tools, by their very nature, are for use by the Client in the production of finished goods for the Customer and, as such, are only of value once proven to work i.e. after the production run. Additionally, they may be of a design which can only be utilised by that Client and, therefore, of absolutely no value to the Customer if the Client ceases to exist. Where invoiced in advance of the run, the debt may consequently prove to be enforceable. A further issue surrounds the value of Tools held by the Client for which the Customer has previously been invoiced. An attempt to offset such value against debts may be successful if they cannot be returned in the event of Client failure.
Identification: Factoring or Invoice Discounting Companies will review Orders and Invoices and enquire about such items whilst touring the premises of the Client. Tooling is prevalent in the Engineering, Automobile, and Printing Industries.
Action A Factoring Company May Wish To Take: Tooling Invoices raised in advance of production would normally be reserved in full, although small exposures (up to say 5%) may be absorbed by prior agreement with Factoring or Invoice Discounting Company.

Trust Receipts

This is a document enabling title to goods to be retained despite relinquishing physical possession of them, and will, therefore, generally retain title under Letters Of Credit upon release of documents (and thereby the goods), and under Stock Confirming Agreements, whereby the goods are financed by a third party.

Factoring Companies Typical Concerns: The right to the proceeds of sale of goods released under a Trust Receipt would vest in the holder of that document, irrespective of any Factoring or Discounting Agreement.
Identification: The Factoring or Invoice Discounting Companies will wish to identify purchases made under Letter Of Credit and determine whether Trust Receipts are a feature (see Letters Of Credit). Factoring or Invoice Discounting Companies will ask the question; Is your stock financed or paid for by anyone other than yourselves? Factoring or Invoice Discounting Companies will also wish to look through the Cash Book for evidence of receipts from Stock Finance Houses, and through the Purchase invoices for stock purchases. Such arrangements generally occur in distribution type businesses, particularly drug wholesalers and jewellery wholesalers.
Action A Factoring Company May Wish To Take: Where Trust Receipts are in place it is usuall the Factoring or Invoice Discounting Company will require reservation in full.

If the Client wishes to continue financing stock, it is unlikely that a Factoring or Discounting Agreement could be maintained with a specific Stock Finance facility.

Two-way Trading or Contra Trading & Factoring

This is where a Customer of a Client is also a Supplier i.e. the same corporate body will feature on both the Sales Ledger and the Purchase Ledger. Otherwise known as Contra Trading or simply Contras.

Factoring Companies Typical Concerns: Where Two-way Trading exists, the Customer may well have established the right to offset amounts due to them against amounts due to the Client. In the event of the Factoring or Invoice Discounting Company attempting to collect the debt, the Customer may well exercise that right.
Identification: Factoring or Invoice Discounting Companies typically ask the question; do you purchase from any of your customers. Factoring or Invoice Discounting Companies will compare the Debtor Listings with the Creditor Listings to establish common names and list the balances due where found.
Action A Factoring Company May Wish To Take: The Factoring or Invoice Discounting Company reserve is usually set up to the value of the potential set-off i.e. the lower of the Sales Ledger and Purchase Ledger balances (after allowing for other ineligibles within the Sales Ledger figure). Where the potential setoff is considerable or regular, the Factoring or Invoice Discounting Company will give consideration to excluding the Debtor altogether.

Unallocated Cash

Any cash which has been posted to a Clients Sales Ledger which has not been specifically allocated to individual invoices, including cash which has been posted to a dump account (Cash Suspense, Unallocated Cash or Unallocated Credit).

Factoring Companies Typical Concerns: Where cash has not been fully allocated there remain Invoices on the Sales Ledger, which appear outstanding when, in fact, they are not. Until the cash is properly allocated the Factoring or Invoice Discounting Company does not know which Invoices these are and would have difficulty in collecting the ledger if it proved necessary. Effectively, the presence of Unallocated Cash indicates to the Factoring or Invoice Discounting Company an un-reconciled ledger. Additionally, these items may represent payments made in error, which may have to be refunded at the Customers request. It can also be caused by round sum payments or on account payments indicating Customer problems (either cash flow or administrative), or by Advance Payments or Deposits.
Identification: Factoring or Invoice Discounting Companies will review the Aged Analysis of Debts for Unallocated Cash columns (see also other names, above), and the Open Item Prints or Statements for evidence or unallocated items, round sum payments, or on account payments. The Factoring or Invoice Discounting Company will use the Remittance Advice Test it will also provide evidence of the correct, or otherwise, allocation of payments (also see Deposits).
Action A Factoring Company May Wish To Take: Unallocated Cash is effectively reserved through the method by which Invoice Discounting is operated i.e. It is the net debtor balances to which reconciliation is carried out. However, it is prudent, in most instances for the Factoring or Invoice Discounting Company, to set up an additional reserve, partly as protection against the un-reconciled position of the ledger, and partly as encouragement to the Client to sort it out.