Factoring with recourse and without recourse, how does it work?

    Factoring as a Financial Tool for Managing Seasonal Fluctuations in Trucking

What specifically is factoring?

Factoring is a financial methodor aimed primarily at small and medium-sized businesses. This process consists of a contract between the company to which they owe, which establishes a specialized company the collection of their credits granted to their clients who have defaulted, companies that are engaged in factoring also known as factor companies, provide also the services of financing, management and administration of receivables, as well as payment guarantee.

El Business market It has been involved in a set of new modalities to which contracts are concerned, which mostly come from North American markets, which have changed business management techniques, we can mention some such as: renting, leasing, know how, merchandising, franchising and Factoring to name a few.

In Spain, factoring associations have been integrated into credit finance companies, affiliated with the Ministry of Economy and Finance, through Law 3/1994 of April 14, which adopts Spanish regulations to the II Directive European.

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Differences between recourse and non-recourse factoring

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With recourse

In the factoring with recursor, the company that will manage and collect the customer's invoices, will not be responsible in case of non-payment or late payment of the collection rights, so it does not assume any risk of the commercial transaction.

With this, I mean that they will not run the risk of the financial insolvency that the debtors have, being able to return to the client the full amount of the unpaid credits.

No recourse

El Non-recourse factoring It is completely the opposite of the aforementioned, in this method, the company that has hired the factoring service will not be responsible in case of a possible insolvency by the debtor, and consequently it is the factoring company that is responsible for assuming the existing risk of the operation carried out between the client and supplier, and even if the latter has made the advance payment of the invoices to his client, he will not be able to request the money in advance.

In this financial method, the factoring company will be in charge of assuming the risk of insolvency that the debtor of the credits that have been granted may present, up to the coverage limit that has been previously established in the contract.

Advantages that recourse and non-recourse factoring offers

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Factoring has consolidated In recent years, it has been one of the most used and beneficial tools in the business field, since this useful tool allows to classify in an orderly manner, as well as constantly legislate the income that companies receive, helping them with the rapid obtaining of liquidity.

Main advantages of recourse factoring: Among the many concessions that this modality offers to its clients, its express validity for any form of payment and any sector of business activity stands out mainly, agreeing between the bank and the clients, the receipts, transfer management expenses among other commercial paper . In addition, to this is added the characteristic that it is compatible with various complementary services provided by the financial institution contracted to carry out management, administration, accounting, among others.

Main advantages of non-recourse factoring: In addition to being able to obtain in advance the payment of the invoices that the client is owed, the factoring tool without recourse, accepts the total risk of non-payment that may exist, as well as the probable sanctions that may arise and fines that non-payment will entail.

In this way, the self-employed or company that hires the factoring service without recourse will be able to disregard with total freedom the eventualities that are very likely to occur, although of course this enormous advantage supposes a higher price than factoring transactions with recourse. What's more, Non-recourse factoring has the enormous advantage of being able to reduce accounting information, removing assets, customer accounts and financing in a chain way.

Who is involved in Factoring?

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-THE FACTOR:

Which can be the savings bank, the bank, or the Financial Credit Establishment that provides Factoring services.

-THE CLIENT:

Any company that generates some commercial credit and needs a Factoring service to collect its debts effectively.

-THE DEBTORS:

They are the people obliged to pay the commercial credits that were granted to them.

Factoring is a short-term financing tool, aimed at small and medium-sized companies, at the same time that it provides financial services and develops administration, management and guarantee services due to the lack of resources of the debtors of the loans granted.
This tool involves the drafting of a contract, by virtue of which a specialized company known as a factoring company is in charge of collecting bills, invoices, promissory notes, receipts, and the collection of outstanding credits.

Through this contract, the factoring company will provide multiple services of a financial and administrative nature for the company that hires its services, among which we can highlight:

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  • Collection management and administration of outstanding debts, which clients owe to the factoring company. In today's markets, small and medium-sized companies are forced to provide payment facilities to their customers, dividing and postponing the collection of the sales of products or services that they produce. For this reason, the number of credits pending collection has increased, this has benefited factoring companies.
  • Financial investigation of clients, that they have outstanding debts with the factoring company and their classification according to the guarantees of economic solvency to pay, that the clients have. It is valuable information for the company, a user when granting credit facilities. The primary objective is to reduce the amount of defaulters to a minimum.
  • Administrative control of collections and payments: It consists of an administrative task, a consequence of the collection management task. The factored company will thus reduce its administration and management costs. The factoring company must respect the collection deadlines established between the factoring company and its debtor clients. The company will send notices to the debtors before the expiration of the credits.
  • Necessary note that all these services entail a cost. The commission or factoring fee ranges between 0.5% and 2% of the total amount of the assigned invoices, depending on the number of debtors, location, among other factors. In addition, if the factoring company requests the factoring company to advance the amount of some credits, a specific fee must be paid for it.
  • Obtaining financing with the advance payment of invoices. This, without a doubt, is the most important service that factoring companies offer to user companies, and this is the one that has contributed the most to its development and acceptance in the international market. The factoring company is obliged to provide the contracting company in advance, the amount of the credits that it has with its clients, with the sole purpose of facilitating an improvement in its liquidity.

Factoring Commonly used in Spain is non-recourse factoring. This means that the factoring company, technically known as a factor, assumes the risk of default from the debtor.

Non-recourse factoring achieves lower balances, smaller, as the account owed to customers and the corresponding premium for bank financing disappear. This allows for better profitability, contrary to what many think, reduced balance sheets are more beautiful financially speaking.

Disadvantages of factoring

However, factoring has certain disadvantages such as:

El type of interest, which is much more expensive in the case of non-recourse factoring. Logically, given the risk that the factoring company takes when assuming debts.

Customers who have to pay by transfer or by check when due, as is often the case with those who are factored, have a notorious reputation for being late with payments. Which leads to the interest rate being higher, and also the settlements become higher due to the lengthening of the terms. And on certain occasions, this ends in returns, when the factor can no longer bear the wait and it charges it directly to the customer's account with the respective financial mess. Since leaving the collection mechanism at the initiative of the debtor, it usually has these characteristics.

Main requirements for factoring

It should be borne in mind that factoring is focused on commercial credits that meet the following requirements:

  • That the operations carried out are of the conventional business of the client.
  • That the sales have been to companies.
  • That the products sold are not perishable.
  • That the credits have been registered as conformed invoices.
  • That the payment method is not long-term.

Fulfilling these simple requirements, acquiring a factoring service is a simple tool to understand and use, as well as a benefactor for both parties to the deal, obtaining positive results most of the time.

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