One of the most used concepts in the economy area is factoring. In this article, we want to explain what forms of factoring exist and what are the most suitable options for your company, in an easy and simple way.
This concept is not very cooked by small and medium-sized companies, however, it is one of the concepts most exploited by the largest companies in the world and that are carried out daily in them. Without a doubt an option for your company. This method is entirely related to the nuclei of collection and payment activity, speeding up and facilitating the flow of payment management for any business.
If we focus factoring on collection control tools, we could say that it is one of the easiest methods to optimize collection, without having to make a commercial discount.
Who is involved in a factoring process
These processes involve:
- The client. It is who uses factoring so that a commercial credit can be generated.
- The debtor. You are obliged to pay a commercial credit
What is factoring? Definition and operation
By means of this method, a loan assignment operation can be carried out that a company can collect in favor of the financial institution.
These types of credits are handled in very common company operations such as the sales flow of products of a place or the services to third parties that the company can offer.
When it comes to a large company that has installment sales, what is carried out is a credit in favor of said company that can be transferred to a third party at a certain time.
What benefits does factoring present based on its services.
Credit risk can be assumed. In this case, this it is called factoring without resources and it is handled as follows: in the event that the credit is assigned to a third person and it is the company that has to pay the person or company to which it is going to be assigned but incurs any payment, it is the financial entity which bears the risk of the operation.
Through factoring, exchange risk can be assumed, if the type of currency on the invoice is from another country. In many cases, especially with currency changes in recent years, this is highly recommended.
Factoring with recourse. Occurs when A collection management is carried out but the risk of non-payment is not assumed. When this happens, if the person who owes does not make the payments on time, no one assumes the risk and the person who is going to receive it is left with an equity gap, until they receive the payment.
You can make the cash collection of all the credit.
Debtors are given business advice
What is the most used factoring option
The reason why more companies resort to this type of method is to be able to have the option of a partial or even total advance of a loan as long as the other party is not a debtor and they have a healthy credit history.
All entities engaged in financial activities perform recourse factoring on a daily basis, since it is a type of factoring that frees the entity from assuming the risk in case of default.
There are two other options
- Notification factoring. Here the person who owes the money is notified of the assignment of the credit. At the time the company is informed, you will only have to make the payment to the second party.
- Factoring without notification. The person who owes the money is not notified so they will not know anything about the assignment, and will pay the people who owed in the beginning. In this case, it is the person who receives the payment, who must redirect it to the entity to proceed with its collection.
The cost of factoring
Now, we have already explained what can be done, but we have not told you about the costs they may have. The process that is done through factoringIt has a high cost, because it is the companies that must apply the commission for each of the operations that are carried out and it is a way of covering the income from debts. So that you can get a little idea of the cost, it is usually 3 or 4% of the nominal amount of the credit that has been given. In addition to that, certain commissions are usually applied for each of the operations that refer to loan advances and are also charged for the associated services. Among the associated services is an insurance that covers exchange rates or commercial reports that allows us to know how the company with which we are going to carry out the transactions is doing.
When it comes to small or medium-sized businesses, factoring is usually not a very good idea and entities reject it. They only accept it when the small business that asks for it is backed by a much larger company that can bear the costs. In addition, payments must be formalized in a long way.
When does it get real factoring with a small company, it is the financial institution that has direct rights to the credit and not the company. It is the entity that pays the transferor company and also the one that takes charge of all the collections that have to be carried out. When the customer's collection date arrives, it is also in charge of making the debt effective.
Advantages and disadvantages of factoring
Let's look at it from where we look at it, factoring is one of the best options when it comes to companiesas it can free up the payment company in case it cannot cope on its own.
However, when we talk about the benefits that these companies give, we have to look a little beyond the credit advance option, since services associated with factoring they play a very important role.
One of the most important services is the support provided by the financial institution with factoring since it classifies the customer's credit and performs external administrative tasks such as collections.
Factoring also allows you to have all the data you need about the solvency of customers with whom you are going to work or are already selling them on credit. You must understand that it is much more important to collect everything that is sold than to sell a large amount.
At factoring includes external collection tasks, although the proper functioning depends on the volume of management that is carried out and the fluidity of payment that the clients have.
If what you want is to guarantee the company a low delinquency, the key is to factoring without resources, since you are giving all the risk of the operation to the entity.
Botton line
- The benefits that the entity offers us are very good for companies, since it is capable of fully improving the financing capacity of a large company, giving it quick liquidity and financing the amount of its sales, avoiding delinquency.
- In addition, it is capable of improving the debt ratio and eliminating accounts receivable. Eliminate the risk of problems in the company because invoices remain uncollected: remember that the important thing is not large sales but to collect everything that is sold.
- It facilitates the control of invoices and leaves the client portfolio always clean.
- Increases collection efficiency by 90%.
- It allows you to plan everything related to the treasury and know your clients 100%, as well as the solvency in their companies.
- However, despite being one of the best options, it also has its bad side. One of the main ones is the cost problems it generates, since by taking care of all the extra costs and external problems, they have to charge very high commissions.
In the event that it is a very great risk for the entity, it may refuse to give the credit of a client or it may even block the credits to a certain company. You can also impose a customer for the assignment of credits; This last point occurs a lot in commercial contracts.
Electronic invoicing and factoring
If you have the option of issuing an electronic invoice, factoring helps you even more since:
- You increase the possibility of financing by 100%
- You favor the possibility that more companies trust you
- You can send documents electronically and this can increase the financing period
- The formats that have electronic invoices already have all the data that is needed to make a reconciliation between the invoices and gives you the option of normalizing the interbank formats.