What is Factoring?

With all certainty that on more than one occasion you have heard of this financial product that is the Factoring as a Financial Tool for Managing Seasonal Fluctuations in Trucking, but you don't know what it consists of, much less what you can take advantage of. Well, I know It's about a product tailored to any businessman or professional and, especially, of small and medium-sized companies that. Through this product they can reduce the workload of the administrative department, outsource the accounting generated by sales and their collection, as well as advance payments on the due date of payment of invoices.

Its effects will be noticed quickly, since it will improve the profitability, credit capacity and financial solvency of your company. Among other advantages of contracting this product are the periodic, regular and updated information of the debtors, the reduction of administrative burdens or simplifies customer account accounting. There is no defined profile of user companies of this financial product, rather the delimitation is provided by the product sold and the payment conditions.

This product, not very well known on the other hand, is ideal for those companies that wish to cover the risk of insolvency of their clients, as well as being able to anticipate, at any time, their forward sales through the entities that market this product. Likewise, its electronic management is comfortable and simple, since the issuer sends and signs the invoice and other documents through the financial institution. And once the debtor has accepted the invoice, it is ready for the amount to be advanced.

Details of the product

It is a financing and administration formula, based on the assignment of invoices: the company assigns the commercial credit of its clients to a company, which is in charge of managing its collection in exchange for a consideration consisting of a commission for administrative services and interest for the financing (advance of the due date of payment of your customers' invoices).

It should be remembered that three duly differentiated entities participate in this financial product, which are the following:

Factor: Factoring company or financial entity that provides the services of this product.

Client: he is the holder of the commercial credits (invoices) and who contracts the Factoring.

Debtors: buyers of the customer's merchandise or services, ultimately the seller.

The Spanish Factoring Association emphasizes that “there is no defined profile of companies that use this product, rather the delimitation is given by the product sold and the payment conditions. In other words, all companies can be Factoring users, sell in the domestic market or export ”. To the extent that all these services, on behalf of the Factoring company, produce internal savings for their customers by freeing them from an enormously expensive, complex and stress-generating workload of all kinds ”.

Factoring Services

The main attractions of this system are the associated services, both administrative and financial, related to the collection procedures of your company, and which are basically the following:

Customer classification: The service includes both the study and analysis of the clients, as well as the decision of the credit limits that should be assigned to each one of them.

Manage accounts receivable: Comprehensive management and monitoring of the invoices assigned to the Factoring company, periodically informing them of the incidents in the collection of each invoice and the status of the accounts receivable from each of the debtors.

Management of collection and unpaid: It is about the initial management necessary to know the causes of non-payment for its possible solution.

Financing: additional service, only in the event that the holder requests it, and that thanks to its flexibility, allows the user to dispose of the amounts of the assigned invoices in advance, at the time and amount that their treasury requires.

Coverage of the risk of insolvency of debtors: coverage up to 100% of the amount of the invoices assigned to the Factoring company pending collection, up to the limit assigned to each debtor. It is also an additional service, at the customer's request.

Advantages of the product

This financial-administrative alternative offers a series of benefits to those who hire it, such as those set out below. Not only from the accounting perspective, but also administrative, and in many cases in the management of the company. And that it will be very interesting for you to meet them in case at some point you are forced to hire them.

• Decrease the administrative burden and streamlines operational processes.
• Reduce bureaucratic work, which contributes significantly to a reduction in administrative, personnel and communication expenses.
• Simplify customer account accounting, increasing the efficiency of collection management.
• Provides information periodic, regular and updated of the debtors.
• Converts credit sales operations into cash sales.
• Avoid the risk of failure due to bad debts.
• Provides the financial structure of the company with a greater robustness.
• It allows a planning of the treasury that optimize cash flows.
• Expand financing capacity and it also improves debt ratios.
• From a commercial point of view, it improves the position of the company against the competition and customers, allowing you to expand your market.

Modalities of this product

There are different types of Factoring, depending on the services you need, or the debtor in question. Among them are the following:

Non-recourse factoring, this modality offers financing, assuming the factoring company the risk of insolvency of the debtors. Obviously, the rates in this mode are much higher.

Recourse factoring, in which the seller bears the risk of insolvency, since the Factoring company is not liable for non-payment by the debtor. This modality is distinguished because it does not necessarily imply financing.

Export factoring, when it comes to operations carried out with debtors residing abroad. It is especially advantageous for exporting companies and SMEs that lack a large infrastructure, since it involves outsourcing services. With Factoring, the export becomes almost a national sale, since the only thing that must be done is to send the goods, and the rest is handled by the Factoring company.

In this type of economic operation, an advance is not normally made when the goods are perishable products.

The contract for these operations

The allocation and contracting process is very simple and without complexities, following the appropriate process by the people or SMEs who decide to contract this financial product. The first step is contact a financial institution that sells it or a Factoring company, to define the most appropriate terms of the operation to the needs of each client and the cost of the same.

For this, in addition to the identification data of the company, the interested party must provide those related to their activity and those corresponding to the clients you wish to include in the contract. Therefore, it must reflect the following data: amount of expected sales, number of invoices per month, form of payment (bill, promissory note, transfer, etc.) and average payment period. They will serve as a basis for evaluating the cost of the operation by the company, and in this way, being able to make an offer of conditions to the client.

At the same time, these types of specialized companies studies the solvency of debtors to subsequently evaluate the portfolio of documents to be negotiated. Through the contract there is a change in the ownership of the credits, so some necessary requirements are established before being able to establish this type of contract:

• That there is an invoice or document to collect for the sale.
• That the invoices come from a legal sale.
• That said sales have been made on credit.

After signing the relevant contract, a letter must be sent to the debtors, informing them that you have signed a contract with this type of product. Therefore, from that date, the payment of the invoices must be made directly to said company.

Factoring cost

The services offered by this financial product represent a cost or price that must be satisfied by the users of said services. The cost is basically formed by two elements that determine it. On the one hand, the factoring fee, for the administrative services performed by the Factoring company, which varies depending on the invoice collection period.

And on the other, the interest rate, which will be applied when taking advantage of the modality that incorporates the advance of funds. However, the cost varies depending on the market situation (based on the 3-month Euribor plus the spread; the final interest rate is revised monthly) and the risk assumed by the company that markets this financial product.

Business benefits

Among the commercial benefits that the practice of this financial operation entails, in the opinion of the Spanish Factoring Association, there are the following aspects that can help the professional or small and medium-sized entrepreneur:

• Noticeably improves sales management and facilitates more effective commercial actions.
• Allows the commercial network focus on your work without carrying out collection procedures.
• Allows a better customer evaluation and a follow-up of them.
• Reduce expenses and time in the preparation of commercial reports.
• Contributes to the correct and effective decision making.
• Improve the position of the company in front of the competition and customers.
• It contributes significantly to the introduction and opening new markets.
• And, finally, it serves to consolidate and increase customers.