CREDIT DEPARTMENT COSTS –This illustration will examine Credit Department Costs and the cost of factoring. In comparing these costs, bad debt write-offs and charge backs must be both included and excluded in the factoring comparisons. 


A credit department handles some, if not many customer service issues after the delivery of product and services.  Accordingly, customer service issues outside the credit department are minimized, as part of this burden is shared with the credit department.  Given that the following objectives are national statistics, additional weight must be given to what the actual statistics are in a specific industry.  With that as a caveat, consider the following Credit Department Costs:



FACTORING – With recourse means “charge backs” must be shown as “bad debt write offs.”  If a factoring arrangement is without recourse (meaning that the factor assumes all risks) a higher factoring percentage is charged. When comparing the “without recourse” factoring arrangement with Credit Department expenses, the percentage of write-offs to Total Sales must also be included as a Credit Department Cost.  In a “with recourse” arrangement, the cost of factoring alone can be compared to Credit Department Costs, exclusive of bad debt write-offs.  Consider the following cost of factoring:



COMPARISONS – Most factoring arrangements include a “with recourse agreement,” meaning that the factor can charge back disputed or uncollected balances which typically are written off. The charge back generally occurs within 3-4 months after invoice date.  Because of the delayed notification the probability of collecting is only about 50% (see CLLA Survey) and this does not include any concessions, which may be necessary to settle a dispute. As reflected above, the Credit Department’s Cost compared to a factoring arrangement with recourse depicts that the cost of factoring is at least twice the expense of an efficiently run Credit Department.  If a company assumes risk that a factor declines, then credit function costs are being incurred as a Credit Department expense even if there is no Credit Department, per se.


When comparing a without recourse (no charge backs) arrangement with Credit Department costs, then the bad debt write-off expense expressed as total sales must be added into the Credit Department costs.  The national ideal write-off costs are .2% (.002 x total sales).  For more information concerning bad debt write-offs and statistics, be sure to see the “National Bad Debt Write-Off Statistics.”