Factoring or risk insurance, are they useful?

The world of corporate finance has many strategies, concepts, and methods of making money and running smoothly. Some are more effective than others, and some aren’t effective at all. Yet they are still used. Some of these practices include factoring and risk insurance. In some rare cases these practices can be useful. But more often than not they are a temporary fix for a problem. They only create more expenses for your company.

Let’s be more specific by explaining what these two practices really are.

We’ll begin with factoring. This is when a company sells its accounts receivables to a financing company to receive a percentage of their value in cash. You receive immediate capital, but overall less money than you would have if you haven’t gone down this road. It’s as if you had a car you could sell for 10,000$, but because you needed the money right away, you sold it for only 7,000$. Long story short, you are trading away your valuables for less than they are worth and essentially cheating yourself out of money.

Beyond that, factoring has many other disadvantages. Customers that were paying for those accounts receivables will be notified when factoring takes place. It warns them about your cash flow troubles and may create some amount of stigma, assuming that your company is going downhill financially. And of course, besides not making as much money from the accounts receivables as you could have in the first place, factoring them is still more expensive than most loans. The financing company you sell the accounts receivables to often charge prime rate interest on cash advances. It creates a total of large amounts of annual interest that could be crippling for your business.

As for risk insurance, it is simply insurance offered to high risk individuals that are more likely to need that insurance than others. For obvious reasons, this is something with very high potential to be painfully expensive.

On one hand you are receiving more money by offering insurance to a wider range of customers. But on the other hand, you are drastically increasing your chances of having to pay significant amounts of money for some sort of accident. Take auto insurance as an example. Imagine that you offer insurance to an individual that has crashed their car 4 times in the past five years. That individual is paying you an insurance premium. But what is the likelihood that you will be paying for yet another crash anytime soon?

In that sense, risk insurance is fairly simple, and it’s fairly simple to see why it is a bad idea.

Of course, some would say that making such assumptions is foolish. Just because that driver has crashed so many times in the past does not necessarily mean he will again. And this is true. Probability is nothing more than a hypothesis really, and one that can’t even be proven until the incident actually happens. That said, the majority of corporate finance operates on predictions. The stock market itself operates almost completely on predictions and guesses. Avoiding high risk situations is just a way for companies to stay safe, and avoid putting themselves in a complicated situation without suitable payoff.

And as we all know, the idea behind insurance is to provide it to individuals who will need it the least. Insurance companies receive a lot of money from their clients, but as soon as that insurance actually becomes needed, they are suddenly losing big bucks. This system of operation may not be necessarily fair, but it is certainly the most financially sustainable. It’s just like lending. You lend money to individuals you are fairly certain will pay it back. It’s just good business practice.

Of course, it’s important to understand that every financial strategy has some merit. If not, no one would have used them in the first place. As mentioned previously, business factoring can be useful in the sense that it provides immediate capital in an emergency. But in the long run, it is the only advantage it offers. And in every other way, it is a hindrance. It’s important to acknowledge that just because a course of action has benefits does not mean it has an overall benefit for your company.

That said, it is up to each individual company to determine whether or not certain courses of action are right for them. Even if those decisions aren’t the best for everyone.

Best Practice #3: Quality Information

When it comes to a process as delicate as collecting money, nothing is going to make that process more frustrating than having inaccurate information in regards to it. Everyone would like the collection process to do its job as quickly and efficiently as possible, and that means not wasting any time on situations that weren’t necessary because someone passed along incorrect information. Precise and organized knowledge is the key to making the entire process as quick and simple as it can possibly be.

In order to achieve this organized information, you’ll need to have a specific system to both facilitate and organize it efficiently. Unorganized knowledge does nothing to lessen the complexity of the process. This system of organization will often have information divided into three sections of reports: management, monitoring, and risk management.

Management reports will deal with lists primarily, detailing past due clients that still need to be visited or contacted by a collections agent, or organizing past due clients by the length of their delinquency or the scale of their debt. These reports are critical for keeping track of clients in a way that determines which ones need to be dealt with first and foremost. For that reason management reports will usually be generated daily to keep the staff updated on what still needs to be done and how urgently those actions are required.

Monitoring reports deal more with portfolio than anything else. These reports will often determine delinquent portfolio based on many different factors, including ratios of efficiency on the collection process, delinquent portfolio by product, and summaries of portfolio by ageing and zone. Generated weekly or maybe even monthly, these reports will generally be used by upper management to address issues with delinquent portfolio performance.

Risk management reports exist to better predict the outcome of different factors in the process, and to allow oversight for the performance of the whole process. Information regarding the impact of collections over portfolio performance through tracking indicators, recovered balances, billing cycles and individual roll down ratios are all included in risk management reports.

Outside of these reports, you will also want to ensure that your basic client information is always accurate. When the time comes to act on a collection, you’ll need to be able to locate and contact the client as quickly and easily as possible, and that means staying up to date with all of their contact information on a fairly regular basis. The ease with which you can physically locate them and contact them is important.

Finally, you’ll want to invest in numerous internal committees and units to gather such information and act on it as necessary. All information needs management, and that can be most easily achieved through the formulation of internal methodological control units and internal past due committees. The greater level of management you have within the collection process, the more accurate and organized the information you need to use will be, and the more efficient and simple the whole process can become.

Best Practice #4: Well-Defined Collection Strategies

For a system that you will have to fall back on several times over the course of your business career, your need to have tried and true but more importantly clear cut and solid strategies and policies in place for everyone to follow. Policies and strategies such as this exist for the sole purpose of directing your employees’ actions under certain circumstances and guiding them on how to respond when things change. Having a good plan is critical to the overall success of the unit, even if that plan has to sometimes be altered on the fly or not used at all.

The first and most important policy to formulate for your collections team is how they are to initially contact past due clients. There are so many ways to go about it, there needs to be a guide that determines which tactic is most effective and when. Should the team contact them through phone, email, or a written letter, and how many days past due should first contact be? Moreover, you’ll need to lay out the rest of the procedure as well, such as how and when second and final contacts should be carried out. This is one of the most important strategies to formulate and clearly define for your team.

You will also need to set up policies for the handling of risk based collections. A lot of things can happen during the process that affect how it needs to be handled. Sometimes the client has suffered personal tragedy, and in that case your agents may need to approach them differently. You may also encounter issues with client excuses, clients unable to be contacted, and other problems and obstacles that you can’t expect to be part of the normal process for a collections officer. You need to lay out strategies and policies for your employees to use when these obstacles arise, in order to handle the situation as efficiently as possible.

You’ll probably also want to use a strategy that divides your clients into segments. Knowing your customer segments is a critical aspect of running any business, and it is exactly so for collections as well. Having different types of clients divided into groups that match the criteria you have set will make it easier to predict how they will be dealt with whenever particular situations arise. What criteria you use is completely up to you, but the most common criteria are location, solvency, ability to pay and attitude.

In the end, these defined strategies and policies will never be one hundred percent full proof. They will often need to be altered on the fly as situations change, but that doesn’t negate the useful nature of having a plan in the first place. Whether or not a plan is used it is always prudent to have one in place as the default method of reaction to obstacles and issues. How you go about establishing those strategies and policies is key to their success.

Dunforce joins BNP Paribas – Plug and Play accelerator

With success stories like Paypal or Dropbox, Plug and Play is considered as one of the best accelerator of the world. Associated with the French bank BNP Paribas, they selected this month 10 Fintech startups, with Dunforce !

This new edition of the Plug and Play program offers Silicon Valley’s expertise and the ecosystem of an international bank to its selected startups. The disruption of banking and financial sectors is at stake.

The BNP Paribas – Plug and Play accelerator offers exclusive services during 3 months to 10 worldwide selected startups. The ambition is to build concrete commercial opportunities with big corporations, in the context of a beneficial partnership.

Dunforce will access, on the one hand, to the large international network of Plug and Play as an investor and expert, and on the other hand, to the main innovation heads of the big european banks.

« It’s an amazing opportunity to accelerate our growth. We already benefit from the support of Telefonica in Spain. Now we have the opportunity to settle on the French market, with some prestigious partners and concrete projects. », highlights Alban Sauvanet, co-founder of the Fintech startup.

Meet us in our new Paris offices, rue de Ponthieu. Starting mid-April 2017.



Plug and Play Tech Center is a technological worldwide accelerator among the biggest in the world. Since its creation in 2006 in San Fransisco, it counts more than 350 startups and 300 partners companies. 

BNP Paribas is one of the main bank in Europe with an international standing. It is present in 74 countries, with more than 190.000 employees, and almost 146.000 in Europe.

Dunforce offers a smart and automated treatment of invoices, with technologies like machine learning and Big data. Companies benefit from Robotic Process Automation (RPA) that allows them to optimize their customer receivables management, from sending to paiement,  from reminder to reconciliation.

How much cost your collection strategies?

Even processes that are designed to gain money still cost money. It’s an unfortunate fact of life and business that we all have to work around, making every process a matter of optimizing your income to outmatch the expense. The same can be said of the collections process, which revolves entirely around gathering money. There are several factors that are a part of the expenses involved in the collection process, and knowing what they are can help you optimize them for minimal expense and optimal income.

Even processes that are designed to gain money still cost money

Thankfully, the majority of expenses involved with the collection process has to do with the employees that deal with the process in the first place. The largest expense of the process is the salary and incentives you set aside for your employees. Obviously the more people you have involved with the collection process the more people you are paying, and the more expensive the entire process is as a whole.

Of course, it may seem difficult to mitigate this expense, but the solution is quite simple. The more efficient your team is in dealing with the collection process, the less of them you will need. Small, efficient teams are just as good as and more cost effective than large, average teams, allowing you to optimize the amount of money that is spent on salaries and forms of incentive.

Following this expense, you must deal with operating expenses, which are usually consistent and moreover, out of your control. Operating expenses includes factors such as transportation and rent, which are usually costs determined by individuals or factors you can’t do anything about. That said, you can always cut back on certain avenues of execution within operating expenses, but you’ll have much greater optimization if you worry about the other factors, which includes fees to collection agencies.

If you’re involved in the collection process, then you already know that collection agencies are the final fallback plan for collecting invoices and debts that the client will likely never pay. Of course, they don’t work for free, and those fees can rack up over time, often forming twenty to forty percent of your collection process expenses. Of course, the best way to cut down on this expense is to not make use of collection agencies at all.

Not that you shouldn’t fall back on them at all when the situation grows desperate, but if your team is efficient and proactive, you will have a higher chance of avoiding the need for a collection agency. There are many strategies that can be used to improve the effectiveness of your collection team, and through those strategies you can reduce the need for collection agencies and therefore mitigate your expenses even further through a reduction in service fees.

In the end, the collection process will drain your fiscal resources, like any process in business does. But like any process, the magnitude of that fiscal drain can be greatly mitigated through smart strategies and careful planning.