Factoring takes place when a business sells a section or all of its invoices and accounts attainable to a financial service provider also called a factor. Factors offer cash for a certain percentage of the value of each invoice. Factors then wait to take up payment from the customer, inferring a fee and interest payment prior to returning the balance of the collected amount to the business which issued and sold the invoice. While a factor should wait to collect its payment, it profits from the fees it charges and utilises them to hedge against the possible chance of customer non-payment.

An Interesting Read: Understand Factoring Business

Industries facilitating from Factoring

Factors have helped a broad range of companies sustain their ground in the winds of unstable economic climate. These industries specifically have displayed the advantages which can come with factoring their invoices.

1. Manufacturing Companies

Maintaining a positive cash flow is essential for manufacturing companies. When the cash flow is stationary or worse becomes low, a company in this industry can run out of business or face an extreme setback when it is not able to complete their orders.

Following are some risks which are common in this industry:

• High production costs
• Tariffs
• Increase in transportation and fuel costs
• Instable currency values

Although, when a manufacturing company factors its invoices, it can utilise the funds to:

• Generate payroll
• Invest as an opportunity of fetching in more revenue
• Venture into new markets
• Enhance factories and purchase new equipment

Manufacturing can continue without slow-paying invoice customers jeopardising the business’s ability to function and maintain its normal pace of serving its clients.

2. Information Technology (IT)

Information Technology is a combative industry. While massive companies generally have easy access to working capital, a trustworthy source of cash flow is one of the key challenges for steady progress and flourishment of a small to mid-scale business.

Some of the main domains of cost-challenges include:

• Payroll expenses
• Operating costs and expenses
• Funding for setting foot into new markets

Factor funding can benefit IT companies in eliminating cash flow concerns generated by slow-paying customers.

Essential advantages of invoice factoring comprise of:

• Availability to an IT industry factoring professional that will steer you in the process
• Simple application and approvals process
• Company owners previous credit history does not affect as factor
• No constraints on how your company employs the money

3. Staffing Firms

Staffing companies aid individuals in getting work and generating money when the job market is inactive. Despite that, these companies themselves can undergo cash flow issues for many genuine reasons.

Some of the reasons behind why these businesses experience fund issues include:

• Seasonal delays
• Dynamic credit terms set by clients
• Slow paying invoice customers
• Swift company development and rise in client demands

Any of these concerns can put pressure on the firm’s cash flow. Although, by factoring their invoices, these business can balance its revenue and utilise the cash for significant tasks such as:

• Generating payroll
• Increasing client bases
• Paying bills for utilities, rent, mortgage or inventory

The staffing company can have the funds it requires without waiting on the clients to first pay for their invoices.

Associated Risk & Prevention

Similar to any type of financing, factoring too has certain risks for both the factoring company and the business whose invoices are being factored. Prior to initiating factoring in your company’s invoices, it is important to be aware of these associated risks and how you can avoid them.

Funding Fluctuations

Factors does not permit payments from those they consider to be ‘poor quality’ debtors. This can cause fluctuations / uncertainties in the lending amount.

Exiting Provisions

If you want to end your factoring arrangement, you will require to repay the money which has been advanced although not yet paid by your customer. This requires planning so it does not affect and cause any essential cash flow issue.

Fraudulence

The primary step to prevent fraud is to curb it at the human level. Prospective clients must be thoroughly examined and undergo the required verification checks. After approval, clients must be routinely audited to make sure that their situations have not altered such that they can be enticed to commit fraud.

Verification of invoices is an additional crucial step which can secure the lenders. Verification can involve a physical review of the documentation or e-invoicing; however, it is not always practical for lenders to verify all invoices.

Benefits of Labuan Factoring License

Factoring is one of the most ancient types of business financing and an essential financial instrument for companies to rapidly develop their cash flow, that simplifies employee payment, manage customer orders and to develop the business.

Setting up your Labuan Factoring Business will aid you in functioning your business with ease efficiently and in accordance with Labuan FSA guidelines:

• 100% foreign ownership
• Essential tax benefits – 3% on net profit
• Engage with several businesses globally in multiple currencies with ease
• Zero withholding tax on payments of dividend and interest paid out
• No import duty / sales tax
• No foreign exchange controls
• No capital gain tax / inheritance tax
• Double Tax Agreements between Malaysia and over 70 countries
• No stamp duty on all instruments relating to offshore business activities including share transfer
• 50% tax abatement for expatriate professionals and managers employed under Labuan Factoring Business Company
• 100% exemption for director’s fees received by non-citizen directors of Labuan Factoring Business Company
• Stringent privacy policy by the strict confidentiality legislation offered by Labuan IBFC

Factoring business should not be mistaken as a loan. Generally, the seller will only sell their account receivables to the prospective buyer, to generate funds or cash which will be used to sustain the cash liquidity of the company. Factoring business can be conducted via the Labuan International Business Financial Centre (IBFC) and to obtain a Factoring License in Labuan, do reach out to our QX Trust team of consultants at CONTACT US or consultant@qx-trust.com for a complimentary session to address all your queries.