What is factoring?

With all certainty that on more than one occasion you have heard about this financial instrument that is factoring, but you do not know what it is and much less how you can take advantage of it. Well i know It consists of a product tailored to any businessperson or professional and, fundamentally, 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 advances on the due date of payment of invoices.

Its effects will be noticeable quickly, as it will improve the profitability, creditworthiness and financial solvency of your company. Among other advantages of hiring 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 companies using this financial instrument, but the delimitation is provided by the product sold and the payment conditions.

This product, little known on the other hand, is ideal for those companies that want to cover the risk of insolvency of their clients, at the same time being able to anticipate, at any time, their forward sales through the entities that market it. product. Likewise, its electronic administration 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 to advance the amount.

Features

Is a financing and management 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 for the payment of your customers' invoices).

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

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

Client: He is the owner of commercial credits (invoices) and factoring contracts.

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, but 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 your customers 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, which are simply the following:

Customer classification: The service includes both the study and analysis of the clients, as well as the decision of the credit limits to 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.

Administration of collections and defaults: It consists of the initial administration necessary to know the causes of non-payment for its feasible solution.

Financing: additional service, only in the event that the holder requests it, and thanks to its flexibility, it enables the user to possess the amounts of the invoices assigned 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 invoices assigned to the Factoring company pending collection, up to the limit assigned to each debtor. It is also an additional service, at the request of the client.

Advantages of the product

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

• Reduce administrative burden and streamlines operational processes.
• Reduce bureaucratic work, which contributes significantly to the reduction of management, personnel and communications expenses.
• Simplify customer account accounting, increasing the efficiency of the collection administration.
• Give 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 greater robustness.
• It enables a treasury planning that make the most of cash flows.
• Expand financing capacity and it also improves the debt ratios.
• From a commercial point of view, it improves the company's position vis-à-vis 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. Apparently, the rates in this mode are much higher.

Recourse factoring, in which the seller assumes the risk of insolvency, since the Factoring company is not responsible for the debtor's default. This modality is distinguished by the fact that it does not necessarily entail financing.

Export factoring, when it consists of operations carried out with debtors residing abroad. It is fundamentally advantageous for exporting companies and SMEs that lack a large infrastructure, since it entails the outsourcing of services. With factoring, the export becomes almost a national sale, since all you have to do is ship the merchandise, and the factoring company takes care of the rest.

In this type of economic operation, you regularly do not get ahead when the goods are perishable products.

The contract for these operations

The award and contracting procedure is very simple and without complexities, following the appropriate procedure by the people or SMEs that decide to contract this financial instrument. The first step is contact a financial institution that sells it or a Factoring company, in order to establish the most appropriate operation periods for the needs of each client and at the cost of the same.

For this, at the same time of 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: expected sales amount, number of invoices per month, payment method (invoice, promissory note, transfer, etc.) and average payment term. They will serve as a basis to examine the cost of the operation by the company, and therefore, to be able to make an offer of conditions to the client.

At the same time, these types of specialized companies studies the solvency of debtors and then examine 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 determine this type of contract:

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

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

Factoring cost

The services offered by this financial instrument imply a cost or price that must be paid by the users of said services. The cost is simply made up of two items that determine it. On the one hand, the factoring fee, for the administrative services performed by the Factoring company, which varies according to 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. In spite of everything, the cost varies depending on the market situation (based on the 3-month Euribor plus the spread; the final interest rate is reviewed monthly) and the risk assumed by the company that markets this financial instrument.

Business benefits

Among the commercial benefits that the practice of this financial procedure implies, in the opinion of the Spanish Factoring Association, there are the following aspects that can contribute to the professional or the small and medium-sized businessman:

• Noticeably improves Sales administration and facilitates more effective commercial actions.
• Enables the commercial network focus on your work without carrying out collection procedures.
• It enables 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 company's position in front of the competition and customers.
• Contributes significantly to the introduction and opening new markets.
• And, finally, it serves to consolidate and increase clients.