Factoring is a financing arrangement that is generally employed by small and medium-sized businesses to help them in maintaining a steady cash flow. As every business owner understands, cash flow is important to ensure the successful, continuous operations of their business hence the importance to understand and know the different types of factoring.

In general, Factoring means a company is turning over their invoices to a third party in return for attaining a portion of those invoices in cash within a few business days.

Types of Factoring

• Recourse Factoring
• Non-Recourse Factoring
• Non-Notification Factoring
• Invoice Discounting
• Maturity Factoring

Process of Factoring

Step One – Selling Invoices

Your business’ invoices are central to this process. You should have unpaid accounts receivable in order to take benefit of this finance option.

You also must decide how many of your accounts receivable you want to sell to your factor. You can sell all of them or just a few, based on how much cash you would require and how many of these invoices that your factor is willing to buy from you.

Step Two – Verifying Your Invoices

This step will be performed by your factor. Prior to attaining your money, the accounts receivable that you are selling should be verified.

Your factor will verify your invoice clients, their credit rating and bill paying history. If your clients have positive bill paying and credit histories, the factor must approve your application for financing. Although, your customers must then be made aware of where to send their payments after your approval.

Step Three – Attaining Payment

Regardless of being approved, you will not receive all of the money for your invoices upfront. The factor will forward you up to 80 percent of your accounts receivable’s worth.

Nonetheless, with 80 percent of your invoices’ worth extended to you, you are free to use that money however you wish. You are not bound to explain how you will spend your cash flow. Some of the more regular intents for which business owners use this financing include –

• Making payroll for employees
• Paying vendors
• Purchasing advertising space on TV, in the newspaper, or online
• Buying inventory
• Paying recurring expenses like utility bills or insurance
• Business expansion to new clients and market segments

You will not be asked to give proof for what and how you spent the cash, nor will you have to make a regular monthly payment as you would on a bank loan.

Step Four – Paying Factor Fees

While your factor will pay you up to 80 percent of your invoices’ worth upfront, it will hold the remaining 20 percent in reserve until your clients’ accounts receivables are paid in full. Once those are paid, it will then deduct its fees from the reserve amount.

The remainder of that 20 percent reserve is then paid directly to you. In some cases, the factor will send the original invoice to each of your customers on your behalf.

Step Five – End the Transaction or Sell New Invoices

After you receive the remainder of the reserve, you can then decide whether or not to end the transaction or factor more invoices. If you want to maintain a steady cash flow while your business is growing or overcoming a financial hurdle, you can continue to sell accounts receivable.

Many business owners use this option to have money on hand without going into debt with loans. This financial arrangement spares your credit score and saves you from having to make a monthly payment to a lender.

Factoring can appeal to you when you require money for your business. You can proceed with confidence by understanding how this transaction works.

Labuan Factoring License

Labuan’s low tax benefits and fully compliant business centre labelled by OECD as a ‘white-list’ jurisdiction could be the ideal set-up for your Factoring Business In Malaysia. A new set-up to capture Asia businesses is a wise choice as it will let you benefit from the many offshore perks. Function a new or extended wing in Labuan for your existing operations in other jurisdictions can also prove to be advantageous.

Key Benefits of Labuan Factoring License

• 100% foreign ownership.
• Significant tax benefits – 3% on net profit.
• Engage with multiple businesses globally in different currencies easily.
• 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.

To obtain a Factoring License in Labuan, contact the QX Trust consultants at +60 3 9212 6940 or consultant@qx-trust.com for a free consultation.