Factoring Companies Guidebook
Seasonal Trade
Definition
Many companies use factoring facilities to help smooth the peaks and troughs of cash flow arising from seasonal trade.
Concerns
The main possible erosion in security is the level of returns and credit notes at the end of one season and the beginning of another. Another is the potential for the Client to offer extended terms to their customers e.g. a Client may produce calendars in the first or second quarter of Year 1 for Year 2. They would start delivering them in the third quarter of Year 1, but due to the final customers' buying patterns, may offer extended payment terms to their customers/debtors until the last month of Year 1 or the first month of Year 2.
Identification
Consider the nature of the business and industry in which the Client operates.
Review the historical trends in turnover and credit dilution ascertaining the reason for credit notes.
Review the terms and conditions of sale and purchase for the evidence of returns clauses.
Treatment
Either a reserve should be created to cover the anticipated level of returns/credit notes or the PPF should be reflective of the potential debt erosion.
Some industries subject to seasonal trade:
- Calendars
- Greeting Cards
- Diaries
- Confectionery i.e. Christmas fayre
- Rag Trade/Clothing
- Drinks Trade
- Farming
- Lawn Mowers
