Factoring Companies Guidebook

Any material which is supplied by the customer to the client free of charge i.e. it will not feature in the purchase ledger nor be identified as a potential contra and more importantly remains the property of the debtor.

See also: - "Goods in Trust Insurance"

Concerns

On an ongoing basis the client may invoice the customer, including the cost of the free issue material, rather than purely for the 'value-added'. In these circumstances the Discounter could be funding the 'free-issue' part of the invoices for which payment will not be received, effectively creating an over-payment situation.

The demise of the Client whilst holding free issue material belonging to a customer may result in that customer attempting to offset the value of those materials against the debt due to us. The unused materials could be returned to the customer, but this cannot be guaranteed, the client may well have used them on other jobs. Furthermore the return of the free issue material to the customer could be delayed in a gone concern situation while the Receiver/Liquidator confirms ownership of the stock. This could delay payment of the debt due to us, which can lead to increased costs and interest being incurred in the recovery of the debt.

Identification

Approaches should be made to the Client's staff to determine the source of materials for specific jobs and whether the client maintains a record of all such materials. Free Issue Material is particularly prevalent in the printing and repro industry where consideration should also be given to Artwork, Moulds, Tools, Printing Plates and components not just raw materials. It may arise in situations where the raw material used is very expensive or scarce and may be sourced on preferential terms and a more timely basis by the customer thus reducing the customers overall costs and ensuring continuing supply e.g. titanium in the aircraft industry.

A review of the customer purchase orders may also reveal free issue material e.g. material to be supplied.

Treatment

Free issue material should be clearly labeled as the property of the customer, segregated from other materials and properly recorded and controlled through a register. Where free issue material is an element within the business of existing clients, the levels and degree of control should be closely monitored on a regular basis. Where controls are not satisfactory to ensure our continuing security, consideration should be given in setting up a reserve, excluding any relevant customers or reducing the PPF.

Our approach and position may be assisted where the client has adequate 'Good in Trust' insurance cover which should not be confused with the clients ordinary 'Stock' or 'Materials in Trade' insurance. The customer must also be fully aware of the insurance arrangements and may seek to take out their own cover to protect their position. We must satisfy ourselves that the debtor cannot offset any claims for loss or damage to free issue material against valid debts. Unless this can be done and the amount is considered significant, then a reserve will probably be made to cover the potential offset value.