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• 10 May

  Funding Contra Accounts

  Contra trading accounts are customers who are also suppliers. This can occur when you purchase from a company that you also supply as a customer.

  Contra Trading Accounts

  An example might be a company that you sell finished products to, but also occasionally buy some raw material from. It is also sometimes seen in the haulage industry. It can occur in any sector where you sometimes purchase from customers that you also sell to.

  The result is that there may be a sales ledger balance, but also a purchase ledger balance for a contra trading customer. This means that the sales and purchases could be offset, such that the net balance is all that is due. If the purchases are significant enough, this could substantially reduce or even completely eradicate the value of the sales invoices.

  Funding Contra Accounts

  This is a concern to an invoice discounting or factoring company as these contra balances are potential dilutions to the value of your sales invoices. If they are funding against your sales invoices there are a number of actions that they may take to secure their position. However, in some cases a funder may choose not to fund contra accounts completely. This is a cautious stance to funding contra accounts, and there are alternative funders that can release some funding by one or more of the following methods, determined by the volume and track record of the customers trading accounts:

  • Reducing the prepayment percentage to account for any potential offsets. This could be overall against all sales invoices, or against just that debtor.
    
    
  • Holding a reserve to offset against the risk - this is a fixed amount held against your overall availability.

  If your funder disapproves a contra account for funding i.e. won't fund at all, you could see if an alternative funder will take a different approach. Or you could ask your existing funder to at least make the account "excluded" so that you don't pay any charges against sales invoices to that customer.

  By Glenn Blackman