Recourse and non-recourse factoring, how does it work?

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What is specifically factoring?

Factoring is a financial methodor aimed mainly at small and medium-sized companies. This procedure is a contract between the company to which they are owed, which defines a specialized company the collection of their credits granted to their clients who have defaulted, companies that engage in factoring, also recognized as factor companies, at the same time provide the services of financing, administration and management of accounts receivable, as well as guarantee payment.

The Business market It has been involved in a compilation of new modalities regarding contracting, which mostly come from North American markets, which have changed business management techniques, we can mention some such as: renting, leasing, know how, merchandising, franquicias y factoring to name a few.

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

Differences between recourse and non-recourse factoring

With recourse

In that factoring with recurso, la compañía que gestionará y cobrará las facturas del client, no será responsable en caso de impago o demora en el pago de los derechos de cobro, por lo que no asume ningún riesgo de la transacción comercial.

By this I mean that they will not run the risk of financial insolvency available to debtors, being able to return all unpaid credits to the client.

No recourse

The Non-recourse factoring It is quite the opposite of the above, in this method the company that has hired the factoring service will not be responsible in the event of a possible insolvency on the part of the debtor, and therefore it is the factoring company that takes care of the existing risk. of the operation carried out between the client and the 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 taking charge of the insolvency risk 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 offered by factoring with and without recourse

Factoring has been consolidated In recent years, it has been one of the most used and beneficial tools in the business field, since this useful tool makes it possible to categorize in an orderly way, as well as constantly legislate the income that companies receive, helping them to quickly achieve 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 administration expenses among other commercial papers . At the same time, to this is added the characteristic that it is compatible with multiple complementary services provided by the financial institution contracted to perform administration, management, accounting, among others.

Main advantages of non-recourse factoring: At the same time of being able to obtain in advance the payment of the invoices that are owed to the client, 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 the non-payment will entail .

From this dynamic, the self-employed or company that hires the factoring service without recourse will be able to ignore with total freedom the eventualities that are very likely to occur, even though this enormous advantage is decidedly higher than that of factoring operations with recourse. And what is more, Non-recourse factoring has the enormous advantage of being able to reduce accounting information, remove assets, customer accounts and chain financing.

Who is involved in Factoring?

-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:

Son las persons obligadas a pagar los créditos comerciales que les fueron otorgados.

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 management, administration 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 receipts, invoices, promissory notes, receipts and the collection of outstanding credits.

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

• Administration and management of collections of outstanding debts that clients owe to the factoring company. In today's markets, small and medium-sized companies are forced to grant payment facilities to their customers, dividing and postponing the collection of the sales of products or services they produce. For this reason, the number of receivables pending collection has increased, which has benefited factoring companies.
• Financial investigation of clients, que disponen deudas pendientes con la compañía de factoring y su clasificación de acuerdo con las garantías de solvencia económica a pagar que disponen los clientes. Es una información valiosa para la compañía, Username al momento de brindar facilidades crediticias. El target principal es disminuir al mínimo la cantidad de morosos.
• Administrative control of collections and payments: It is an administrative task, a consequence of the collection administration task. The factored company will thus reduce its management and administration 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.
• It takes note that all these services have a cost. The commission or factoring fee ranges between 0.5% and 2% of the total amount of the invoices assigned, depending on the number of debtors, location, among other factors. At the same time, if the factoring company asks the factoring company to advance the amount of some credits, you will have to pay a specific fee for it.
• Achievement of financing with the advance payment of invoices. This, without a doubt, is the most important service that factoring companies offer to user companies, and it 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 it has with its clients, with the sole purpose of facilitating an improvement in its liquidity.

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

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

Disadvantages of factoring

However, factoring has certain disadvantages such as:

The type of interest, which is much more expensive in the case of non-recourse factoring. Logically, given the risk that the factoring company runs when taking over debts.

Los clientes que disponen que pagar a través de transferencia o cheque a su vencimiento, como suele ser el caso de los que están incluidos en el factor, disponen una notoria fama de retrasos en los pagos. Lo que lleva a que la tasa de interés be más alta, y además que las liquidaciones se vuelvan más altas debido a la duración de los plazos. Y en determinadas ocasiones esto acaba en devoluciones, cuando el factor ya no aguanta más la espera y lo carga de forma directa a la cuenta del cliente con el correspondiente lío financiero. Ya que deja el mecanismo de cobranza a propuesta del deudor, suele tener estas características.

Main requirements for factoring

Pay attention that factoring is focused on commercial loans that meet the following requirements:

• That the operations carried out are from the client's conventional business.
• 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 form of payment is not long-term.

Fulfilling these simple requirements, obtaining a factoring service is a simple tool to understand and use, at the same time beneficial to both parties of the deal, obtaining positive results most of the time.