Frequently Asked Questions
Getting Started with EPASS International's Trade Receivables Factoring Program
1. How does factoring work?
When establishing a factoring agreement, EPASS International determines whether or not it will purchase receivables owed by each of your customers, based on the credit risk of each customer. Once an agreement has been signed, your company makes sales, offers payment terms, and prepares invoices as usual. Whenever you make a sale to a credit-approved customer, you send the invoice to us for factoring.
2. How soon are funds available?
Within 48 hours after purchasing an invoice, we advance cash to you for the invoice amount less fees.
3. What is the application and approval process?
To set up a factoring relationship, you will need to submit an application packet, which includes business information, a list of customers, and relevant financial statements. Once the complete packet is received, approval typically takes two to three business days. An EPASS International representative can give you a complete list of what you need for an application packet.
4. Is there a limit to how much I can factor?
When entering a new agreement, EPASS International sets a lower transaction limit on the total invoice amount it will factor for your customers. There is no upper limit.
5. Are there any types of businesses that would not be good candidates for factoring?
Businesses with limited return policies are preferred candidates. Businesses with progressive billing and consumer receivables are not eligible. Also, EPASS International cannot typically provide factoring for government receivables, advertising agency receivables and construction contracts.
6. How much does factoring cost?
Pricing is a global figure that depends primarily on EPASS International’s funding costs and the overall credit risk of EPASS International’s portfolio of factored receivables. As EPASS International’s funding costs change and it reassesses its overall portfolio risk, pricing terms may improve.
7. Why do factoring costs seem expensive?
When prospective factoring clients compare factoring to automobile or mortgage lending rates, factoring initially appears expensive. Prospective clients tend to annualize the points charged, equating the fixed percentage fee charged on an invoice paid in approximately one and a half months to an annualized interest rate.
This is both an incomplete and incorrect comparison. First, factors purchase accounts receivable at a discount. They do not lend money. The paper is short-term in nature and management intensive versus a bank loan, which is secured against some stable asset and usually advanced once. Factors are continuously advancing and collecting accounts receivable, providing clients with ongoing reports, credit due diligence, and personalized account management services.
When prospects make this comparison, we ask them to look at the amount they offer for early payment. If the standard 5% discount for payment within 10 days is annualized using the thirty-six 10 day periods in a year, they have lost 180% interest.
Are they really losing 180% for early payment? Of course not. It is more appropriate to look at the opportunity cost of the funds. If the funds cost 5% per month and you can take them and generate more than a 5% return or save more than 5%, then factoring may be the best alternative. What amount of return is generated when a company has an order but no way to fill it? The answer is none. How much return does a KShs 1,000.00 overdraft fee generate? None.
A business must weigh the costs of factoring against not having the immediate cash flow. Most often the choice is between factoring and putting up with severe cash flow problems and missed sales opportunities.
8. Our bank offers us an invoice discounting facility. What’s the difference between invoice discounting and factoring?
Both factoring and invoice discounting are transactions designed to get raise working capital from a finance company by using accounts receivable and (or) other current assets. However, there are key differences between these two transaction types.
Factoring is an off-balance sheet transaction that involves the outright sale of receivables to the factor in exchange for immediate payment. Invoice discounting, on the other hand, is an on-balance sheet form of collateralized borrowing where you, the client, pledge your unpaid receivables in exchange for a loan. For more information on how to assess transactions that involve the exchange of an interest in the future cash flows associated with a specific receivable, click here [PDF].
Banks often have restrictive regulatory lending requirements that prohibit them from making certain loans, especially unsecured loans to small growth businesses. Factoring firms are not in the lending business, and the decision to purchase receivables is influenced by the credit quality of the obligor base - not your qualifications as a factoring client. Due to this difference factors can extend financing when commercial banks cannot.
9. Is it possible to factor government claims?
EPASS International does not factor government claims. Government contracts are issued pursuant to the Public Procurement and Disposal Act No. 3 of 2005. Various provisions of the Act limit EPASS International’s ability to purchase receivables owed by government agencies. For more on the Public Procurement and Disposal Act of 2005 and factoring government claims, click here [PDF]
10. How should we properly account for factoring transactions in our annual report?
When entering into any financing transaction there are certain criteria that you, the client, must carefully consider to ascertain whether the financing proceeds received should be reported as revenue or as a liability.
If you are an existing client, please click here [PDF] to access guidelines on the application of international accounting standards to a your financial statements, assuming you are currently in a position of obtaining proceeds from factoring or other types of financing transactions.
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