Why the Major Currency and Payment Processing Firms Must be Taken Seriously

A host  non-bank FX Broker firms that operate around the globe; the most sophisticated offer a full range of currency & interest rate products plus currency payment products (e.g. payment cards) plus highly functional dealing platforms to assist corporates who trade but don’t hold bank accounts in multiple currencies.  Increasing foreign trade and more exotic currencies mean that it’s essential for corporates to have immediate access to adequate currency trading facilities to protect themselves against global currency volatility.

I was recently excited to see the arrival of global regulated FX and money transfer firm AFEX into the competitive corporate market of Manchester, England;  a first to my own knowledge; until now all non-bank service providers have operated from 200 miles away in London.  For regional corporate treasurers to have immediate and direct local personal access to a range of professional currency risk management products in my region is a major attraction, AFEX should be congratulated in taking the initiative to bring sophisticated risk management services to a major UK business hub.


This made me examine the wider benefits & risks that surround this industry, which regularly receives negative publicity, not least from the banks who are in direct competition with FX firms, and who will seek to highlight the risks of dealing with unregulated firms. Risks do exist due to the many cases of fraud, scams etc. where (surprisingly in a heavily regulated sector) some unregulated firms have made criminal gains by persuading an unsuspecting client to remit funds for a deal that doesn’t exist.

I believe there are very compelling reasons for corporates to use independent currency management and payment service firms, provided that they are careful to exercise the correct level of due diligence & establish the credibility of any Forex dealing services firm making a sales approach.  As an ex-banker, we were always taught to be wary of the industry as a whole; some of this was to enhance the bank sales pitch though there was also a healthy suspicion of all non-banks without too much differentiation between providers. However, there are some major players in this industry who are properly registered, professional and legitimately operating under the national regulations of the financial markets they are working in, providing a vital service to the large community of corporates who can’t access the mainstream bank products.

The real driver for many corporates considering using an independent provider is not price or competitive edge but quite simply the greater availability of the credit facilities necessary to create a portfolio of currency hedges to protect their business, where limitations of bank credit facilities is an increasing worry.

In my previous blog post on the issue of FX, I mentioned that many corporates don’t have true visibility of their FX flows and are unable to pro-actively hedge their FX exposures –  https://www.linkedin.com/pulse/fx-visibility-another-key-2016-treasury-challenge-colin-evans?trk=hp-feed-article-title-publish.  However, of equal importance is the fact that any corporate wishing to trade forward looking FX contracts needs a specific credit line for dealing from the mainstream banks and for many companies the squeeze on corporate credit facilities means that there are no facilities left over for hedging.

Faced with FX volatility and lack of bank credit lines, the logical alternative is to work with an independent FX dealing firm who are more open to providing dedicated FX credit facilities; the ability to hedge currency exposures is critical in minimising the P&L risk of having unhedged currency flows and the importance of having this capability cannot be understated.

Firms wishing to do due diligence, have support from regulatory bodies such as the UK Financial Conduct Authority (“FCA”) have created public registers of brokers authorised to trade in those jurisdictions which are a good starting point to investigate the validity of someone making a sales call – https://register.fca.org.uk.

The soundest advice that such a short article can offer is that any corporate looking to use non-bank providers for currency services, should enforce the highest standards of regulatory checking, asking lots of validating questions to the provider including who their banks are (firms that hold their operational accounts with global banks have to jump many hurdles to hold those accounts); who their shareholders and / or financial backers are and if possible to obtain some good references. There are two key pieces of advice to further test the integrity of the firm you are considering dealing with

  • Seek further information about the key risks and downsides of any proposed currency strategy particularly if a lot of benefits are being offered and very few disadvantages or risks.
  • Ask the FX company to provide the FCA registration number of the individuals who are providing strategy advice; it’s not enough to know that the provider is regulated but also the people responsible for customer strategy advice.

Faced with the decision to hedge or not to hedge a volatile set of flows, the treasurer has to use all the tools at his disposal and my own personal dealings with FX industry firms have been very positive, but were also based on rigorous questioning of the companies speaking to me; these have definitely enabled me to obtain hedging facilities that could not be obtained from the main banks and provided valuable P&L protection for the stakeholders of those businesses.

As ever these views are my own, which are intended to stimulate debate on key issues in the Treasury, Banking and cash management industries, and I very much welcome the contribution of individual readers who wish to provide their thoughts and comments on this subject.

Colin Evans

Why Corporates Should Never Underestimate the Role of the Treasurer

Or why they need lots of love….

With a growing number of subjects which require their expertise, the role of the Treasurer is gaining higher visibility and becoming more in demand across corporate organisations. This was originally sparked by the financial crisis of 2008-9, but in the light of Brexit, it will become important to a new audience; possible shifts in business policy in the USA and Europe as well as increasing size, variety and complexity of M&A deals taking place across the developed world.

Changes in the types of finance being used by corporates with shifts away from traditional loan facilities towards either Asset Back Lending (”ABL”) such as Factoring, or new Fintech style produces such as ‘Supply Chain Finance’ as well as demands being placed by stakeholders to maximise working capital from the existing balance sheet all indicate a growing new area where treasury professionals are likely to be needed.  Facilities such as ABL have grown considerably in usage since 2009 but require close active management if they are to be maximised, this article by PWC sees this as a growing part of the Treasury ‘toolkit’.


It highlights research commissioned AIG and Prime Revenue that suggests some GBP29bn of working capital is ‘trapped’ in the UK economy – the chances are some of it belongs to businesses of this blog’s readers!!


Many banks are re-evaluating their customer relationships, either for whole product suites (such as RBS existing international cash management) or individual customer relationships where lending alone doesn’t justify the capital costs of maintaining certain relationships; the role of the Treasurer is to have close contact with current and potential partners, to know their organisational limitations, to help the relationship bankers to stay as partners, and to identify where banks may be reconsidering those relationships. Deutsche, HSBC, Barclays and Standard Chartered among others have all recently announced strategies to exit certain countries reduce clients and implement simplicity and efficiency initiatives which usually mean a shift in the customer proposition.  The DB press release is a good example, but faced with this the Treasurer may need an action plan that can bring in replacements should the unexpected happen.


Treasury has overlaps with nearly all aspects of their colleagues in other corporate departments, which is a key factor in their ability to influence working capital areas such as days payable outstanding (DPO); days sales outstanding (DSO) and days inventory outstanding (DIO); by educating colleagues, gathering data and building strategies, they can impact the cash implications of how these metrics and directly influence the liquidity available to the business from every existing £ / € or $ of operational purchase or sales.

TMI Magazine recently published an article from Standard Chartered Bank which is in no doubt about the importance of Treasury in the maximisation of working capital, not least because debt is less available and cash more restrictively controlled in many parts of the world. http://www.treasury-management.com/article/4/276/2321/working-capital-management-new-challenges-and-opportunities.html

With more pronounced foreign exchange volatilities likely to be with us for several years, there is also an increase in the role for Treasurers to provide as much knowledge about currency impacts to the CEO, CFO and major stakeholders in order to protect the profitability of the business.

The art of cash forecasting, (much of which is still non-automated) serves to identify the various actions needed to maintain and increase liquidity; a good forecast will highlight areas of working capital need and then provide measurements to highlight how successful those actions are as well as pinpointing critical ‘timing’ issues between inflows and outflows enabling management to take corrective actions.

As a treasurer, I remain convinced that the treasury function has a critical role to play in influencing all aspects of corporate finance, whether it be how a business is funded, how its operations use cash, how international trade drives risk that needs to be managed, and ultimately how banks are kept happy in their desire to work with a particular business.  However in order to do this the Treasurer needs to be part banker, part financial reporting, part sales, part procurement, part asset management and part diplomat, which is one of the things that makes this such a rewarding area of business to develop a career.

How to Start Improving the Collection Success of your Export Letter of Credit Sales

For as long as any of us can remember, Export Letters of Credit have occupied the unique position of being both one of the most “secure” forms of trade payment but also one of the most frustrating and hard to collect.


This high level article revisits some very simple reasons why exporters can have a hard time, (statistics suggest between 20-50% of Letters of Credit are rejected at first presentation), in navigating the tricky process of Letter of Credit Presentations.


What seems to simplify the whole process of managing L/C’s is the existence of global set of standard rules and principles called “Uniform Customs & Practice for Documentary Credits”, (“UCP 600”) however this over simplification is where the trouble can start.


First of all, Exporters make some simple (but expensive) commercial mistakes:


·         It’s true that some Letter of Credit rules are obtuse and often difficult to understand by exporters.

·         However, there is no avoiding the fact that some Exporters don’t appreciate that it’s a rigid commercial procedure and pay too little respect to L/C rules and standard banking practices.

·         Low frequency of L/C’s or overall size of the business mean there is seldom a specialist in organisations.

·        Exporters fail to co-ordinate the L/C process between their finance / commercial functions and production / shipping before starting the contract.


However, it’s not all down to things in the control of the Exporter:


  • Banks apply their own strict interpretation of UCP 600 rules; generally speaking the bank’s decision is final.
  • Banks over ‘engineer’ letters of credit; in some instances banks demand almost impossible conditions from the beneficiaries in their L/C texts.
  • Issuing banks often with little commercial thought issue vague L/C texts open to multiple interpretations.


What can be done to prevent discrepant presentations?


      Pre – Document Preparation Stage:

  • Discrepancies happen even for the most diligent exporter; therefore if possible build a strong relationship with your bank and the importer; if things go wrong there is a better chance of co-operation saving both time & money
  • Exporters must read & understand the key UCP 600 rules, with particular reference to the context of their export transactions.
  • Obtain the draft L/C text from the buyer before the original L/C is issued; this helps identify & fix problems before they arise and become difficult & expensive to put right.
  • Immediately contact your bank if there are any conditions or sentences on the letter of credit text that are incorrect, vague or open to interpretation.
  • Upon receipt, study the L/C text as early and in as much detail as possible – in most cases problems cannot be fixed at presentation stage, if in doubt, stop the process and consider halting the shipment.
  • Make sure that NO conditions are technically challenging and that ALL conditions can be complied with at the presentation stage.
  • It’s critical to check the list of required L/C compliant documents to be presented after shipment; it’s a prescriptive exercise but never under estimate the importance of the text, marks, inspections, signatures to be provided prior to presentation, which can eliminate the majority of L/C discrepancies.
  • Be proactive & contact the Buyer immediately if there are any conditions or clauses that cannot be complied with.


Document Preparation Stage:


·        Complete ALL documents as requested by the credit and make detailed reference to the L/C rules (UCP 600) when preparing the documents.

·        All company or third party signatures or authentications must be made by requested persons or institutions.

·        Present all required documents with no omissions.

·        Present the correct number of originals and copies as requested by the L/C.


  • Dates on the documents must be are in accordance with those mentioned on the credit; set aggressive deadlines for final documents to be ready; avoid making late shipments or late presentations.
  • Maintain pressure on third parties (e.g. freight forwarders) where documents are being produced outside the company to ensure that presentation is made within time.


         After Presentation Stage:

  • Even payment for documents accepted ‘cleanly’, payment can be slow or delayed, so keep the pressure on the Buyer & his bank to issue the L/C payment.
  • Check the status of the L/C daily with your bank; try and obtain early indications of the Issuing Bank’s review of the documents…


M.François Terrade, Head of Structuring (Europe)

I have produced an (Edited) translation from original French, of a very powerful article written by M.François Terrade, Head of Structuring (Europe) – Managing Director of Demica Europe, (formerly Managing Director – GE Capital, Cross Border Receivables Financing) about the future implications of the proposed merger of GE Factofrance by Crédit Mutuel-CIC, for businesses looking to raise working capital not only in France but across Europe.

From this background Francois is uniquely placed to comment on this merger as the former head of the Cross Border financing group and which I have some very deep and positive experiences.

I for one will be taking a much close look at Demica and other similar financing providers as the independent GE door closes.

See link for the original French LinkedIn article – https://www.linkedin.com/pulse/reprise-de-ge-factofrance-par-cr%C3%A9dit-mutuel-cic-en-france-terrade?trk=prof-post

RIP – GE FactoFrance

François Terrade

Head of Structuring (Europe) – Managing Director, Demica Europe; http://www.demica.com/



With the acquisition of GE Factofrance by Crédit Mutuel-CIC, one thing about the future of Factoring in France is certain – “The Fintechs are ready to take over”.

The announcement of the proposed merger on 3 December at La Défense marks a major turning point for the factoring market in France. In a few months the new organization will become the No. 1 in the French market with over 40% market share. Crédit Mutuel has no doubt demonstrated its desire to develop this growing market and well ahead of its other banking competitors, including BNP and Credit Agricole. But is this the point?

GE Factofrance, (who would celebrate its 50th anniversary next year), was the last major independent provider in the factoring sector, valued for its independence, its quality services, the dynamism of its teams, its original approach to client needs and in particular the emphasis of the quality of trade receivables and not just the customer’s credit quality itself.


Importantly, GE (with no bank network) had no requirement for customers to change operational bank accounts, with GE Factofrance relying instead on working with the company’s accounts in its banks, whilst remaining competitive in pricing. This approach has enabled it to maintain and develop strong positions notably in turnaround business / “special situations”, as part of pan European corporate strategy and to service companies owned by Private Equity funds.


This meant that there was no pressure on borrowers to change operations, move bank accounts or enter complex banking arrangements. This is what many SMEs require – the professional financing of their, without ulterior commercial thoughts or control, delivering simple working capital finance to power the company’s “engine”.

The structure of the French factoring market will be certain, but is it good for business? It is highly possible to doubt it. It will be interesting to know the views of SMEs and industry professionals (advice, brokers, actors restructuring, investment funds …). One thing is certain, for those who want to keep the old model, they can regain independence, simplicity and service quality from the new providers of receivables finance; the “Fintechs” who provide alternative receivables finance developing their offers of disintermediated finance programs, often based on the establishment of a securitization fund (FCT); a simple tool that the whole world is starting to consider.


Paradoxically, the banking factoring market reshaping will help to bring these new players the boost they needed for the benefit of SMEs.


Treasury Outsourcing – How to be a Winner and Not a Loser

Last week, I participated in a web discussion hosted by global Treasury website, CTMfile.com about the pros & cons of Treasury Outsourcing. ( https://ctmfile.com/story/treasury-outsourcing-how-to-manage-the-good-the-bad-and-the-ugly-in-outsour#.VdxqXbnbKP8 ).

The discussion considered issues such as the impact of outsourcing on organisations and a wide range of topics around this subject, such as when (& when not) to outsource, possible implications for treasury, getting the implementation right and what happens if the company decides to bring outsourced services back in-house.  It seems that outsourcing is enjoying increased popularity at the moment (having been a popular solution during the original shared service centre boom of the Mid 2000’s); and now having spent some time discussing the subject with Jack Large of CTMfile.com and Andrew Marshall of SLG Treasury, I thought it worthwhile to write something for the Elite Treasury Blog that might interest readers.

Some key thoughts

What to Outsource

Many corporates are likely to consider outsourcing of some internal functions, and inevitably Treasury processing would be included in outsource project discussions; my view of this is that only generic processes (e.g. generating, processing and reconciling payment files and other bank transactions) should generally be considered for possible outsourcing; key tasks that require specific expertise, decision making and personal interaction with other departments or external parties (such as FX dealers, bank lending departments etc.) should be excluded from the outsourcing work scope.   A major exception to this is if the corporate is taking on complex new responsibilities outside the expertise of its treasury team then it may reduce operational risk by appointing a specialist service provider.

The Treasury function is now a key segment of many corporate finance departments, with treasury holding decision making responsibility that can affect tax, audit, funding, M&A and wider corporate finance strategy; there are many specialised treasury tasks being done within the business that could be put at risk by migration to an external provider creating exposure to unnecessary risk.

What are the Potential Benefits or Otherwise

  • Technology– certainly the ability to access state-of-the-art technology from professional outsource providers can offer major cost and efficiency and implementation savings, especially if an organisation is at a point of having to upgrade or replace its current treasury systems and facing either a large IT spend request, or use of increasingly obsolescent software and hardware.


  • Transaction Costs – The economies of scale available to outsourcers can be very attractive if the corporate is able to create a very specific set of tender documents, allowing bidders to offer detailed pricing in response to accurate types and volumes of transactions to be processed. This then becomes a very useful part of any Service Level Agreement (“SLA”) that will be used to manage the service if it goes live.


  • Reduced Headcount – It is true that large scale outsourcers should be able to maximise efficiency compared to certain in-house processes and functions; if these are realised, then the corporate would be able to reduce headcount via redundancy or redeployment of those roles being replicated outside the company. However, this does create a risk that should something go wrong, the business may have lost the people it needs to fix the situation.


  • Increased Value of Remaining Functions – A treasury department with certain outsourced functions should be able to focus on improving the quality of its remaining services to the rest of the organisation, whilst also increasing skills and developing its team abilities in more complex areas of treasury.


  • Increased Risk – Every corporate should recognise that ‘headline’ cost savings driven from the direct replacement of in-house services by outsourced providers is not the whole story. If the service isn’t delivered on time, on budget or if minimum acceptable SLA metrics are not met, then the potential risks in terms of reputation of the business, management time dealing with error correction, customer interest claims, additional bank fees and costs etc. can far outweigh those P&L costs realised through the outsourcing project itself.


Ideally, the Corporate Treasurer must be a full time member of the project team and be able to conduct a full risk analysis of any proposed outsourcing requests, to consider the following:

  • Appropriateness of the tasks to be outsourced
  • A detailed examination of the outsourced treasury work specification to be included in the bid documentation, checking for accuracy and detail of descriptions and volumes of work to be performed.
  • Full participation in the bid evaluations, with particular emphasis on checking the functional specifications offered by bidders, scrutiny of quoted costs, evaluation of any specialist treasury software and hardware to be employed, as well as security in what is a highly sensitive area of the business.
  • Creation of a Treasury specific SLA that can be clearly implemented and managed by both the corporate and vendor as the ‘living’ document used to run the outsourced treasury functions. The SLA should include clear sets of measurable metrics and objectives that can be monitored and agreed by both sides, together with agreed sanctions, corrective actions and timescales to be applied if the SLA terms are breached, whilst the SLA may also offer certain incentives for high performance.
  • The vendor should provide a detailed protocol explaining its business recovery procedures and back up arrangements if there was to be a major interruption of outsourced services, stating timescales and pre-determined actions to restore full services to the client.
  • Finally, project failure is always a possibility and the Treasurer together with the CFO, CIO and other key team members should document internally how the processes could be brought back ‘in-house’ in case of either catastrophic failure of the outsource project, or change of policy by the company. Having direct contractual access to hardware and software providers in case of any breach of contract or termination could minimise problems for corporates who need to bring services back ‘in-house’.


Controlling the process

Strong vendor management is key to delivering & maintaining successful outsourced projects; large sums of money and reputational risk are at stake and every outsource vendor should be prepared to allocate dedicated key staff to the client, providing access to senior management at regular client review meetings,  which should review all key data metrics and overall compliance with SLA objectives, together with presentations by  Vendor representatives on how service will be maintained and / or improved from current levels, together with any risks or issues identified as potentially affecting the outsourced service.

It is critical that the corporate appoints a senior member of management to manage the vendor relationship and who has sufficient knowledge of the subject matter; able to spot any weaknesses in the outsourced service and to challenge the vendor, whilst directing them in such a way that a clear set of corrective actions are implemented very quickly.


Any outsourcing of treasury functions creates new problems and situations that don’t already exist in the business and therefore there is inherent risk in taking on these complex and expensive projects.  I have no doubt that employing the correct mix of planning, active treasury involvement, close scrutiny of bid proposals and micro management of the implementation and subsequent operation of outsourced functions can significantly mitigate those risks, and deliver the promised cost and efficiency savings with minimal disruption to the business.  Conversely, those projects that rely too heavily on the outsource provider to drive the process, write its own process specifications and generally be the lead partner in the relationship are highly likely to face significant cost and process dangers, and the client may not be sufficiently equipped to deal with any major problems that arise from the outsourcing project.


Further Reading – the following resources offer further detailed and useful insights into the subject of Treasury Outsourcing.


Brace, R. ( 13 Nov 2014). Taking the Stigma Out Of Treasury Outsourcing, Special Report | Treasury Outsourcing; Global Finance Magazine



Bahni H. (n.d.). Treasury Outsourcing in Practice; Treasury Management International



Alfonsi, Michael J. (13 May 2014); Get the Most out of Payments Outsourcing, TreasuryandRisk .com



Disclaimer:  Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations mentioned and are made in a personal capacity, unless explicitly stated.  Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

All content provided on this blog is for information and discussion purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.

What’s Hot for Summer – Round Up of Latest Treasury News

It may be the height of the summer vacation period, but there’s a still a lot of good treasury debate, insight and news articles to digest whilst taking that well earned break.  I have provided links to some of the current treasury topics that I have found whilst surfing the web; this is quite often the way I update my knowledge of what are the ‘hot topics’ in the industry, particularly as it is now such a global community and things that may be happening on the other side of the world can have a significant effect on how we do things here in Europe.

I hope you find the following items to be interesting and possibly thought provoking **:

** A free website membership might be required to access some of these online articles mentioned below.


TMI –  (Treasury Management International)


  • Collection Factories: An Optimal Roadmap (Citi) – This article explores ways in which activation of the Single European Payments Area (“SEPA) has opened up new ways in which receipts can be more simply and cheaply integrated into ‘collection factory’ type environments. In my opinion this now also creates new Shared Service Centre (“SSC”) opportunities for companies where the required SSC business case could not be achieved under the old European payment infrastructure. http://www.treasury-management.com/article/4/320/2675/collection-factories-an-optimal-roadmap.html


Treasury Today

  • Handling China’s RMB regime shift – What are the implications for corporates with close commercial ties to China? With the increasing availability of offshore RMB hedging since 2012, is now the time for corporates to take a fresh look at their RMB hedging strategies and also will the weaker RMB lead to depressed demand and greater risk for manufacturers of goods that rely heavily on China for export sales? http://treasurytoday.com/2015/08/handling-chinas-rmb-regime-shift-ttti
  • Best Practice Handbook – Cash Management in the Nordic and Baltic Regions 2015 – A detailed guide to the latest cash management issues faced by corporates operating in the Nordic & Balkan regions, which are becoming increasingly less detached from mainstream European cross border cash management structures. http://treasurytoday.com/handbook/cmnb-2015


  • Implementation & Centralization: Why Cigna Adopted SWIFT – SWIFT are working harder than ever to become the primary direct supplier of corporate payment and cash management systems, in direct competition to the banks; there is a lot of uncertainty amongst treasurers about what using SWIFT directly actually means; this informative article about Cigna Insurance provides one company’s experience in setting up global payments via SWIFT. http://www.afponline.org/pub/res/news/Implementation___Centralization__Why_Cigna_Adopted_SWIFT.html


SEPA for Corporates

  • 10 Reasons Why SWIFT Connectivity Is Not a Magic Bullet – An interesting blog article that provides some journalistic balance to the debate about how implementation and benefits of using SWIFT direct connectivity in the corporate environment may not always be realisable. I think this is a good measured piece that highlights some considerations that certainly smaller or less integrated corporates need to bear in mind if considering the move to SWIFT. http://www.sepaforcorporates.com/swift-for-corporates/10-reasons-swift-connectivity-magic-bullet/


Jack’s CTMFile


Luxembourg Wort




Disclaimer:  Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations mentioned and are made in a personal capacity, unless explicitly stated.  Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

All content provided on this blog is for information and discussion purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.

Maximising Cash from Factoring

For many corporates, the signing of the all important Factoring Agreement signals the end of much hard work in finding a Factored Receivables lender, gaining credit approval and negotiating the commercial legal terms and legals, after which a reliable and consistent stream of cash can be expected to flow into the company bank account every week.

Sadly it’s not as simple as that, and as I have seen over many years in managing and improving underperforming corporate Factoring schemes, it’s the operational process itself and contractual small print that can cost a business up to 40% of its anticipated factored cash flows.  Experience shows that many corporates pay little or no attention to the finer detail of maximising Factoring flows thus missing out on additional liquidity, incurring higher than expected costs per € or £ of borrowing (“borrowing efficiency”), and even experiencing financial pressure that the Factoring was supposed to address.  So why does this happen and how can it be avoided?

This is also the moment where the bank steps back, as they are not equipped (and do not expect) to work closely with their customer’s back office to ensure that the funds released by factoring are as high as they could possibly be.

Here are the main problems experienced by corporates in maximising Factored receivable cash flows, which are then examined in more detail in the sections that follow:

  • Poorly negotiated receivable reserve provisions in the contract
  • Incorrect segregation of factored and non-factored receivables in the General Ledger.
  • Incorrect IT programming against the banks file specifications.
  • Lack of active management of the factored invoice portfolio
  • Issues related to credit insurance


Reserves under Factoring Contracts


When negotiating the initial factoring contract, it is essential that corporates read the commercial breakdown of all items and events that permit the bank to withhold sums of money from the factored loan advances issued against each assignment of invoices. The main withholding situations that the bank is seeking should be outlined in the Terms Sheet outlining the main points of the facility. The table below shows the most common examples of items which could inadvertently cause excessive withholding of funds, the borrower should look at the terms of each in detail and challenge the bank where its assumptions look to be overly aggressive.




Type of Withholding Comments & Mitigation
Contractual Reserve Typically 10% up to a max of 20% – represents the amount that the bank considers necessary to cover any default events under the agreement.

Sometimes the bank will specify “10% of factored receivables or a minimum of € X whichever is the greater; the danger is setting the minimum withholding amount to high so that the borrower consistently suffers greater than 10% withholding.

Mitigant Use whatever evidence (e.g. low past due aged debts as % of total receivables, past borrower financial history), available to minimise the rate as close to 10% as possible.
Concentration Reserve Additional entitlement to withhold funds if the total receivables of a customer or group exceed x% of the factored receivables. Typically a 15-20% concentration would trigger an additional withholding.

This can be a particular problem in a seasonal business where one customer may appear to have a dominant concentration of receivables at certain times of year due to cyclical buying behaviour.

Mitigant The borrower needs to understand its concentration risk early in the negotiations; if concentration risk is due to highly reputable customers it may be possible to improve the concentration measurement, also it may be able to negotiate a grace period for exceeding concentration limits within which the withholding will not be applied.
Unpaid / Disputed Reserve Allows the bank to reserve 100% of the invoice when its ageing goes beyond a certain limit (e.g. 60 days past due).

Aged debts are an underappreciated issue in factoring, as funding relies on a continuous recycling of old debts for new ones. When a debt goes past the contractual ageing, the bank will deduct any unreserved amount from the next available loan advance, therefore reducing the recycling of the borrower’s working capital. Conversely collecting debts within the permitted ageing will release any reserves as cash to the business.

Mitigant Factored receivables should be treated equally to all other receivables in the credit and collection process; poorly performing factored receivables could lead to the bank wishing to take additional reserves, whilst strongly performing receivables can enable improved terms and pricing upon renewal.
Rebate Reserve Additional claw back used where borrowers have bonus and / or rebate type arrangements with customers (e.g. volume purchase rebates), to protect the bank against customer deductions against payment of receivables; the amount of the reserve is linked to the percentages allowed on the sales contracts.  The bank will also look to build reserves where rebates are paid by the borrower in lump sums.

If the borrower underestimates the rate of rebates in its sales ledger, this can seriously reduce the amount available to borrow, or result in the bank imposing additional withholding to cover greater than expected risk of collecting the full invoice amounts.

Mitigant The borrower needs to quantify its rebate levels early in the negotiations and be prepared to challenge the bank’s assumptions if considered too high.  IT systems often need special configuration to be able to recognise rebate deductions during the cash application process to enable accurate reporting to the bank; otherwise there could be a build up of borrowings against funds that have in fact been kept by the customers.
Specific Reserves ‘Other’ amounts that the bank may set aside against perceived risks arising from the factored receivables, a classic example being lack of adequate credit insurance, or accounting discrepancies in the reconciliation of the factored receivables.

Borrowers should seek to minimise any ‘open ended’ provisions permitting the bank to make reserves at is sole discretion; the permitted situations for taking special reserves should be restricted to an exhaustive list of items that the bank & borrower can quantify.

Mitigant Credit insurance is a very good example – banks may lend against a percentage of uninsured receivables, but as this is discretionary, it’s worth the effort go over all credit insurance limits in detail making sure they are adequate for the levels of activity anticipated with the factored customers.  Similarly where customers are refused insurance, they should be considered for exclusion from the factoring as many contracts may charge commission on any transferred receivables, even if not ultimately funded.


  • Note that most of the principles explained above are also applicable to other similar financing arrangements such as Asset Backed Lending where maximisation of a collateralised “Borrowing Base” is desired by the borrower.

Segregation Issues

Huge reconciliation and withholding issues can occur when factored receivables continue to pay into non-factored (and unpledged) bank accounts that the bank does not have access to and (vice versa) non-factored customers may incorrectly pay into factored (Pledged and blocked) bank accounts, thus blocking the flow of free cash to the borrower.  Close attention must be paid to the identification of customers as factored and non-factored in the Accounts Payable / ERP systems of the borrower and cash application staff need to be trained in managing cash flowing into two separate environments, and to spot and fix errors quickly when they occur.

IT Programming Issues

This in itself is a huge subject; briefly, getting the IT solution right depends not only on following any IT file specifications obtained from the bank, but also on extensive testing and (because IT staff are not necessarily familiar with the borrowers’ commercial processes), the whole AR process from Invoice selection through to cash application needs to be jointly examined in detail between IT, Treasury and AP staff with respect to changes needed for implication of a factoring programme.  It is vital to identify all internal programming or process changes that need to be made to ensure accurate data is provided to the bank. Incorrect IT files or processes can lead to very costly build up of unreconciled items, and to possible discretionary cash withholding by the bank which requires a very clean set of data files to maintain efficient factoring schemes, and borrowing efficiency.

Active Management

In addition to areas such as overdues and credit insurance, the ‘active’ management of other areas of a factoring scheme is critical to avoid costly mistakes leading to unexpected withholding of loan flows.  Borrowers should become familiar with all available reports available from the bank, and build specific metrics and reconciliation tools to make sure that what is being reported by the bank reflects what the borrower thinks should be happening in his internal AR ledger.  A Treasury team member should be given responsibility for monitoring all factoring activity, measuring the actual v assumed loan advance rates when receivables files are loaded and loan advances issued; snags are inevitable in large factoring projects, the aim should be to identify and fix issues before they are allowed to build up for several months and suddenly the bank announces that it is to withhold additional percentages of the assigned receivables.

Credit Insurance

If the particular factoring agreement requires 100% credit insurance before funds will be advanced then it is a fairly straightforward task to know what limits are available on individual buyers and to monitor them against actual sales activity and AR ledger balances.  However, some schemes do not require mandatory insurance and will even advance 100% of eligible funds against uninsured debtors; in this case the borrower needs to keep accurate records of uninsured buyers and their current status in the factoring, with the aim of obtaining credit insurance if possible to remove any discretionary lending risk.  Also for multinational schemes the local law around assignment of receivables can make insurance mandatory (e.g. Germany) and will lead to exclusion of certain receivables even if the overall programme does not have mandatory credit insurance requirement.

Major factoring programmes are a significant commercial undertaking and this article can only illustrate some of the key areas to be addressed when going into factoring; however the underlying message is that borrowers should never under-estimate the time, care and effort and implementation cost necessary to make the factoring results successful and that this is not something that automatically happens because an agreement has been signed.

Colin Evans


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