Factoring is an increasingly popular financial tool. It consists of selling open receivables to a financial institution (factor) . Even my dentist uses factoring. Factoring is a wonderful solution for medical professionals who deal with long cash cycles.
In this article I want to talk a about how you can implement factoring in Dynamics AX. In the download section you can find an AX project with the framework for a factoring solution. It should be fairly easy to modify this to your own specific requirements.
The benefits of factoring are simple:
- Improve cash-flow (no outstanding invoices)
- Reduced credit risk
- No collection costs or hassle
- Service costs (can be substantial)
- Long term commitment (possibly)
- Monthly minimum requirement
- Additional reporting requirements
- Customer satisfaction (some customers may frown)
- Only available for customers with approved credit rating
- Not available in all countries
There are two variations of factoring. Open factoring tells your customers in clear print that your claim on their money is handed over to the factor.
The alternative is stealth factoring. On the invoice from my dentist is no mention of factors or rerouted payments. Stealth factoring runs into legal issues in some countries. Under
Whether or not factoring is good for you depends on your situation and the services available to you. Talk to my dentist.
What I want to talk about in this article is the problems you will face after you decide to go with factoring. How are you going to manage your factoring in your AX administration?
Depending on the factor you work with the process may vary. There is no best practice or standardized method. The included solution is primarily a framework. It may require modification based on your particular situation. Generally speaking though…
- The factor will assign a credit limit to new customers based on their credit score.
- After you deliver your goods or services and post an invoice, the factor will pay you the invoice amount minus a percentage of the invoice as a security deposit.
- You receive the security deposit in full after the customer pays his invoice.
- The security deposit goes to the factor if the customer defaults on his obligation.
How to implement in AX
It is almost possible to build this process in standard AX. We can use Suppose your factoring partner pays you 90% of each invoice and withholds 10% as a security deposit.
- For every sales order, we have to procure the services of the factor. For this we need a purchase order to the factor for a service item named ‘factoring’ in the same amount as the sales order. This balances out the sales order.
- Now we need to sell our sales order to the factor, or we won’t have any revenue at all. For that, create a new sales order to the factor with two lines. One line for a service item named ‘prepayment’, in the amount of 90% of the sales order. The second line for a service item named ‘deposit’ in the value of the remaining 10%. The second line is placed ‘on hold’.
- We diverted our revenue from our customer to our factoring partner and simultaneously split it 90/10.
- After the customer pays his bill, we release the second order line and claim our deposit from the factor.
- The second order line is canceled when the customer defaults.
There are always exceptions, aren’t there?
Things that make you go ‘boo’ are:
- large order volume (the number of orders, not the volume on the orders).
- Customers are not (all) credit worthy.
- Customers are united in buyer groups (the factor will assign a credit limit to the group rather than to the individual customers).
Eurofactor, the factoring service of Credit Lyonais, does not accept individual orders but wants a copy of the open balance report. This changes the process and makes it virtually uncontrollable.
Let exceptions be exceptions for now. In the next part I will elaborate a little on possible posting profiles and useful customizations.
To be continued…