What is factoring?

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One of the most used concepts in the economic area is factoring. En este post deseamos explicarte What alternatives for factoring exist and which are the most suitable alternatives for your company, in an easy and simple way.

This concept is not well cooked by small and medium-sized companies, despite everything, it is one of the concepts most exploited by the largest companies in the world and that are carried out daily in them. Undoubtedly an option for your company. This method is absolutely related to the nuclei of the collection and payment activity, streamlining and facilitating the flow of payment management for any business.

If we focus on factoring in collection control tools, we could say that it is one of the simplest methods to make the most of collection, without the need for a commercial discount.

Who is involved in a factoring procedure

These processes involve:

• The client. Es quien usa el factoring para que se pueda generar un crédito comercial.
• The debtor. You are obliged to pay a commercial credit

What is factoring? Definition and operation

Through this method, a loan assignment operation can be carried out that a company can collect in favor of the financial institution.
These types of loans are handled in very common operations of the company such as the flow of product sales. of a place or the services to third parties that the company can offer.

When it consists of a large company that has installment sales, what is done 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 your services.

Credit risk can be taken care of. For this case, this it's called factoring without resources y se maneja de la próxima manera: en el caso de que el crédito be cedido a una tercera persona y sea la compañía la que tenga que pagar a la persona o compañía a la que se le vaya a adjudicar pero incurra en algún pago, la entidad financiera que asume el riesgo de la operación.

Exchange risk can be taken care of through factoring, if the currency of the invoice is from another country. In several cases, mainly with currency changes in recent years, this is highly recommended.

Factor with recourse. It happens when A collection administration 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.

All credit can be collected in cash.

Debtors receive business advice

What is the most widely used factoring option?

The reason why more companies resort to these types of methods is to be able to have the option of a partial or even full advance on a loan as long as the other party is not a debtor and has 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 taking over the risk in case of default.

There are two other options

• Notification factoring. Here the person who owes the loan transfer money is notified. At the time you report to the company, you only need to make the payment to the second party.
• Factor without notification. La persona que debe el dinero no es notificada, por lo que no sabrá nada sobre la asignación y pagará a las persons que debían al principio. Para este caso, es la persona que recibe el pago, quien debe redirigirlo a la entidad para proceder con su cobro.

The cost of factoring

Now, we have already explained what can be done, but we have not told you about the costs that may have. The procedure 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 face amount of the credit that has been granted. At the same time, 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 consists of small or medium-sized companies, Factoring is not usually a very good idea and entities reject it.. They only accept it when the small company requesting it is backed by a much larger company that can bear the costs. At the same time, the payments must be formalized in the long term.

When it gets 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 care of all the collections that have to be made. When the customer's collection date arrives, it also takes care of making the debt effective.

Advantages and disadvantages of factoring

Let's see it from where we look at it, factoring is one of the best alternatives when it consists of companiessince it can free the company from payments in case it cannot cope on its own.

In spite of everything, 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. Who are you going to work with or are you already selling them on credit? You must understand that it is much more important to compile everything that is sold than to market a large quantity.

At factoring includes external collection tasks, even though the proper functioning depends on the volume of administration that is carried out and the fluidity of payment that the clients have.

If what you want is to ensure low delinquency for the company, the key is factoring without resources, since you are giving all the risk of the operation to the entity.

In conclusion

• 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.
• At the same time, it is capable of improving the debt ratio and clearing accounts receivable. Eliminate the risk of problems in the company due to the fact that the invoices remain uncollected: remember that the important thing is not the big sales but to collect everything that is sold.
• It facilitates the control of invoices and leaves the client portfolio always clean.
• Increase harvesting efficiency on a 90%.
• It enables you to plan everything related to the treasury and to know 100% your clients, as well as the solvency of their companies.
• Despite everything, despite being one of the best alternatives, it also has its bad side. One of the main ones is the cost problems it generates, since by assuming 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 can refuse to give credit to a client or even block credits to a certain company. You can also impose a customer for the allocation of credits; This last point occurs a lot in commercial contracts.

Electronic billing and factoring

If you have the option of issuing an electronic invoice, factoring helps you even more since:

• Increase financing opportunity on a 100%
• You favor the opportunity for more companies to trust you
• You can submit documents electronically and this can increase the funding 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.