Factoring providers risking the over-advance: Undercapitalisation

Factoring providers risking the over-advance: Undercapitalisation

It’s not uncommon for factoring providers to dance with the devil when over advancing on receivables for existing clients.

Factoring clients often request additional capital from their funder to make advance payments to suppliers and for the right client factors usually make concessions.

When a client has been with a factor for a while, and a strong relationship gets established, credit/account teams take a “predicted” view based on spreads and the asset base.

The problem with predictions is that they can’t be trusted and when over-advancing the account goes into undercapitalisation.

Leigh Dunsford, Stak

Undercapitalised accounts only end up going one way when collect outs occur. The factor loses.

  • Are the over-advance funds creating new fundable assets?
  • How long will it take to covert the funds into new receivables and will it ever make there?
  • What happens if the funds used don’t result in new assets or an unpredictable event occurs that prevents the clients from completing sales?

One significant issue that arises is understanding the client’s supply chain and if the operation has enough capital to survive while new stock is being converted to sales.

For factors that blindly over-advance on receivables for inventory here are some risks to consider:

  • Is the money being used to fund deposits in hope factories complete?
  • Does the client have a tight handle on QC to match deliveries?
  • Does the client have the funds to pay balances to ship goods?
  • Will the client run out of money to complete?
  • Will the orders get cancelled?
  • Are the customers buying goods strong enough to allow credit?
  • Are they buying inventory that might not get sold?
  • Are they buying inventory that has residual value?
  • Are their bills up to date with logistics to prevent STOP shipments?
  • Do they have import licenses to cover goods?
  • Are their insurances up to date?
  • Do they have enough funds to cover duties?
  • Do the goods have a warranty and who covers it?
  • Are they licenced to produce goods and is the factory?
  • ‚Ķ..and the list goes on and on.

The above list is just a small teaser of the complexities involved when allowing over-advances to clients.

The reality is that going into under capitalisation on client accounts can leave factors exposed if supplier payments are not managed correctly and leveraged receivables never get replaced.

It’s like lending 100% LVR on a property asset because the borrower wants to renovate, only you fail to check that the funds are actually being used for that purpose or if they can actually complete the project. Will it even result in an uplift in true value, who knows. The factor loses.

Stak works in tandem with factoring providers that see the benefit of trade facilities and transaction management. Stak provides funding for anything pre-shipment and does not provide factoring services. We stick to our specialisation.

Stak works by funding pre-shipment costs right through to delivery and creation of fresh fundable receivables for factors.

Factors are in the business of advancing on receivables; Stak’s in the business of making sure they’re accepted.

Need pre-shipment funding for a client? Ask Stak.

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We regularly share our thoughts on trade finance, lending, procurement, logistics, and international trading.

Stak provides working capital to clients that sell to some of the largest buyers in Australia & overseas.

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