Factoring is used by the parties to a transaction for the supply (purchase and sale) of goods in cases where the buyer dictates its terms. To find out what factoring is in simple words Let's look at the translation of the word. Translated from English, the word "factoring" means "mediation". The deal is governed by Art. 824–832 of the Civil Code of the Russian Federation. This is a financial service of a bank or a commercial company to legal entities. The bank pays the supplier for the goods and then collects the debt from the buyer. Delivery of goods under a factoring agreement with a deferred payment allows the supplier not to divert funds from turnover for a long time.
In simple words, factoring is a way to quickly restore the supplier's working capital with the funds of a bank or a factoring company in a sale and purchase transaction. In factoring, the seller delivers the goods to the buyer on a deferred payment basis.
The debtor (debtor) is the recipient of the goods, who, ultimately, has obligations to pay for it to the financial agent (factor). The essence of this transaction is that the factor finances the supplier, which cedes to him the right to claim money from the buyer with a short repayment period. Banks or commercial firms that finance suppliers receive a commission from them for the service provided and the right to demand a debt from the buyer.
The service is similar to lending, but with certain features. In particular, payment can be deferred for a period of several days to six months. In Art. 824 of the Civil Code of the Russian Federation, factoring is defined as a financing agreement against the assignment of a monetary claim.
In factoring transactions, the following terms and definitions are used:
UBRD credit card up to 240 days without %
300 000 rub.
240 days
from 30.5%
from 19 to 75 years old
Consideration:
Service:
0 rubles
Credit card #120podZEROL of Rosbank
Credit limit:
RUB 1,000,000
Grace period:
120 days
from 21.4%
from 18 to 65 years old
Consideration:
Service:
0 rubles
Halva credit card from Sovcombank
Credit limit:
350 000 rub.
Grace period:
1095 days
from 0%
from 25 to 75 years
Consideration:
Service:
0 rubles
Installment card Svoboda bank Home credit
Credit limit:
300 000 rub.
Grace period:
365 days
from 0%
from 18 to 70 years old
Consideration:
Service:
0 rubles
Companies turn to the financing service of a transaction factor in emergency situations, but it is then that it is difficult to persuade him. The safety of working capital allows you to increase the profit of the company, immediately invest the money received for the goods in development, and not to pay off the debt that arose after the delivery.
In the Russian Federation, the service is in demand in the following cases:
The service will not be provided:
It is not used:
Most often, factoring is used by medium and small enterprises seeking to establish cooperation with large customers and develop their business. Reasons for using this financing scheme by SMEs can be as follows:
By financing the delivery, a commercial organization or bank constantly monitors the activities of the recipient. They analyze the transaction itself and the fulfillment by the parties of its conditions, and also check the buyer for compliance with the requirements of the financial agent. If the factor sees in the actions of the buyer signs of impending bankruptcy, intentional withdrawal of assets, he will terminate the contract and demand immediate repayment of receivables.
The financial agent also monitors the supplier. If he or the recipient violates the terms of the contract, he has the right to present a claim to each of them.
The factor has an agreement with the supplier, and the recipient under this agreement becomes his debtor.
Credit and factoring have much in common, but there are significant differences between them.
| Credit | |
| Short-term financing (from several days to six months) | Provide for a long period |
| Unsecured security | Give under surety or bail |
| The amount is determined by the value of the supply agreement transaction | The amount is predetermined |
| Funds are provided to replenish working capital | Issued for business development purposes or other |
| They will issue the amount (sometimes in parts) minus the commission | The entire amount will be paid out immediately |
| The set of documents is smaller (contract, invoice, invoice). It is possible to conclude an open-ended contract and receive funds under it on waybills and invoices. | To draw up a contract, it is necessary to collect a package of documents. Repayment of the loan will not be the basis for obtaining a second one. A new contract is required. |
| The third party returns the debt | The debt is repaid by the person who issued the loan |
According to the form of risk distribution, factoring can be with or without recourse.
The regression service is very popular. Its benefit is obvious for suppliers, since formally it is insurance in case the recipient refuses to pay for any reason or delays with it. The service with recourse provides that the factor has the right to return to the supplier all invoices unpaid by the buyer, and demand the return of the issued funds if the latter violates the terms of the contract and does not pay the invoices.
The service without recourse is used more often. In this version of the transaction, the factor (company or bank) takes all the risks of possible non-payments and covers all the costs of the client, including legal debt collection. Possible risks non-payments are immediately included in the price of the service, so non-recourse factoring is more expensive than recourse factoring.
With the Buyer Guarantee service, the supplier can work with buyers by providing them with preferential terms payment, start cooperating with new partners, enter new regions and markets. The guarantee works as follows:
It is called factoring for the buyer. The recipient, not the supplier, applies to the bank for support, with the aim of buying a product with deferred payment. The contract itself is the same: between the factor and the supplier, but the initiative comes from the buyer. He should interest the supplier in the proposed payment scheme. Typically, purchasing factoring is used in situations where the buyer knows in advance to whom he will sell the purchased goods. This is the case, for example, in chains of wholesale intermediaries. At the same time, the supplier has no risk, and he agrees to such terms of the transaction.
Purchase factoring is used in the following cases:
Depending on the participants in the transaction, factoring can be international and domestic. Participants in international transactions are residents different countries. International factoring contracts are concluded for a long period, and the supplier usually transfers to the factor the receivables of the recipient in full or the debts of all his buyers in one country.
According to the form of informing the parties, factoring is divided into closed and open. In the case of an open service, the buyer knows the fact that the supplier has concluded a contract with the factor, and he makes payment to the factor. At closed version the recipient of the goods does not know that the supplier has entered into an agreement with a financial agent. He pays for the goods to the supplier, and he himself calculates the factor.
In supply financing, the parties use lending, factoring, forfeiting and assignment. The differences between lending and factoring are described above.
Factoring is used when selling goods on a deferred payment basis. In this case, the buyer pays part of the money (up to 90%) immediately, and transfers the rest later. The third party of the transaction is a factor. The contract is usually concluded for a period of more than a year. If the transaction did not take place, the factor has the right to demand the return of its funds or use insurance (if any).
In forfaiting, a third party immediately redeems the buyer's obligations to the seller. The supplier receives all the money at once, and the forfaiter can sell his claims to others. The term of forfaiting can be up to several years. Forfaiter assumes all obligations and risks of the debtor under the transaction.
The differences between forfaiting and factoring are as follows:
An assignment is a transfer of rights from one company to another for a fee. During the cession, an agreement is drawn up for the assignment of the right to claim for the return of the debt to the assignee from the assignor. In order to finance a transaction under an assignment agreement (purchase of debt), documentary evidence of all initial obligations is required. Assignment provides companies with the opportunity to quickly receive funds and invest them in other transactions, get rid of hanging debts, develop a more successful business and increase its liquidity.
Speaking about factoring, about what it is and how to describe it in simple words, we end up with the following definition: a set of financial services for deferred payment, which producers and merchants have agreed on. That is, the supplier sells the goods to the buyer and does not require immediate payment for it. Factoring operations- These are instruments that allow an enterprise to receive financing from a bank against receivables.
Economists believe that we are talking about the procedure for trading in debts, and the discovery of factoring is attributed by historians to the times of antiquity.
We turn to the description of factoring, based on expert ideas about what it is.
An interesting scheme of work financial mechanism. After all, many firms pay with its help with their counterparties. Here, the absence of collateral is practiced, and limits are set differently.
The factoring scheme looks like this - the supplier of the factoring company acts in such a way that services and goods are provided to the buyer with a deferred payment, and in the meantime, documents confirming the delivery (waybills, invoices) are transferred to the bank.
Then the supplier receives money from the bank (up to 9/10 of the delivery amount).
And when the grace period ends, the bank receives the entire amount from the buyer and transfers the remaining funds, minus its commission, to the supplier company.
In this case, the factor is the bank itself, which has both the entire amount of necessary information and its own methodology for assessing the solvency of the company's counterparties.
If companies establish cooperation with the maximum number of debtors, especially by providing them with payment deferrals, then all produced volumes will be quickly and correctly implemented.
Factoring service has proved to be a successful scheme, and this enables enterprises to optimally combine their financial prospects built on effective management cash flows, with a holistic development of production.
The recourse type of factoring is the most relevant and is more popular than other types. The profitability of factoring with recourse is obvious for clients, because it is elementary insurance in case the debtor (client's buyer) for some reason refuses to pay or delays it beyond the due date - then the client returns the money to the company.
The main and significant advantage of factoring with the right of recourse is a good growth in sales, because according to these schemes, any banking organizations Yes, even with a deposit. The money is immediately credited to the account and is already working for profit, which can only be interrupted by the fact that the debtor is declared insolvent.
In case of factoring without recourse, as it is understood by experts, the risks of non-payment on debts are assumed by the factoring organization. The risk of non-payment is immediately included in the cost of the service, so non-recourse factoring costs the seller more than recourse factoring. The factor conducts a thorough analysis and determines the solvency of the debtor. As a result, the client is guaranteed full payment.
A convenient opportunity is provided by the "Guarantee for buyers" service.
Relationships of this type carry less risk for the factor, and the commission for services, of course, is significantly lower: they are available.
In the event that the buyer does not fulfill its obligations to pay for the delivery, it is necessary to transfer the original documents that confirm the validity of monetary claims against the buyer.
Payment under the guarantee is carried out within 4 months.
Another interesting type of factoring service is called purchasing (reverse).
The term "buyer factoring" is sometimes used because it accurately expresses its essence. A buyer (debtor) comes to the factor, interested in receiving goods with a delay.
He resorts to the purchasing variety if he is interested in a deal, but does not currently have the necessary funds, while the supplier does not want to cooperate without an advance payment.
International factoring is perhaps the only real financial instrument, allowing deferred payment for international transactions. The supplier and the buyer here are residents of different countries. But the rules of ordinary trading do not apply here.
In a varied gradation of factoring transactions "for three" it is worth paying attention to the open and closed types of this pool of financial services.
At open version, especially popular abroad, the debtor, being officially notified in writing of the presence of the factor, transfers funds to his account. Moreover, sometimes the factor is not included in the tripartite transaction without the consent of the debtor. And closed factoring is an operation carried out only between the creditor (seller) and the bank (or other factor). And the purchaser of services (goods) does not know about it.
Many entrepreneurs, for whom the services of a financial intermediary have suddenly become vital, have a choice of whom to contact - a bank or a specialized company. Today, both types of players are very successful in this market, but there is still a difference in the provision of factoring services.
To begin with, let's take a closer look at the question - what is factoring in a bank? Many users note that such an important quality as reliability is inherent in banks, they also emphasize the universality of services.
Indeed, in order to provide this financial service businessmen need others, and banks, which have no restrictions in this sense, are still more the best option. A logical addition to factoring services is that banks offer settlement services.
But factoring companies have other advantages, the first of which is efficiency, which is provided by special business processes. But in the bank, the speed of the implementation of operations is reduced due to the workload of employees with administrative issues in work with other divisions of the same bank.
With a conventional loan, the contract is limited in time, and with this transaction, the loan is indefinite.
The conclusion suggests itself: specialized companies are constantly improving their well-established technologies, while in banks they are more conservative, which reduces the quality of factoring services, and the volume too. Along with the aforementioned efficiency, companies are more flexible in relation to the client.
The specialists of the companies have excellent knowledge of product features, and this allows them to take into account the needs of customers and tailor the product specifically for them.
In banks, a small staff and strictly regulated product parameters do not allow approaching each client individually.
The factoring agreement, or what, perhaps, it would be clearer to call an agreement on the transfer of the right to a debt, is, in simple words, the main legal document A that captures the relationship between the intermediary and the provider (and possibly the recipient).
The law for this document provides for a number of nuances that are understandable at the expert level, but the main ones are the terms of factoring on financing and the monetary claim assigned in order to obtain financing.
Let's give an example of factoring calculation.
On the 20th day of the month, the wholesale supplier signed a contract for the supply of goods with the Buyer in the amount of 500,000 rubles with a payment deadline of the 30th day of the same month.
The wholesale supplier urgently needs money, so on the 25th he concludes an agreement with the Factor, transferring to him the right to claim money from the Buyer.
Factor on the 26th pays the Wholesale Supplier 7/10 of the required amount - 350,000 rubles (this can be referred to as a factoring loan).
On the 30th, the Factor issues a payment request to the Buyer.
AT Russian Federation, where the main factors in these operations are banking institutions, the volume of factoring turnover barely reaches half a percent of the gross domestic product, while in the West it can sometimes amount to 1/5 of GDP.
On the 31st, the Buyer transfers 500,000 rubles to the Factor.
Of these, the Factor retains a commission for itself, and transfers the rest to the Wholesale Supplier.
If, for example, we are talking about a commission of 3%, then this is 15,000 rubles. That is, the Wholesale Supplier will receive the last transfer from the Factor in the amount of 135,000 rubles, and the total amount received by the Wholesale Supplier will be 485,000 rubles.
Having lost only 3% of the amount on the commission, using the factoring procedure, making simple transactions in his accounting department, the Wholesale supplier received 70% of the entire payment at the right time.
Such a factoring calculation is the simplest example, indicating the simplicity of the relationship scheme itself along the supplier-factor-buyer line.
Watch a video about the concept of factoring.
Very often, factoring and forfaiting are considered as similar mechanisms, but the differences between them are quite noticeable. The difference between financial transactions lies in the features of their implementation.
Forfaiting, which is important, is, in simple words, a very long operation that can last several years, while factoring takes a maximum of six months. The forfaiter, who pays the entire amount at once, is ready to risk everything (even political interference), and the factor, who does not give more than 90%, shifts part of the responsibility to the client, so that, in which case, at least some of his funds will be returned.
Forfaiting assets may well be sold to third parties, but factoring assets cannot.
The general purpose of additional financing does not negate the significant differences between factoring and from. The first operation is voluntary, and the assignment can be determined by law.
Assignment does not have the nature of a restriction on property, and factoring involves the transfer of precisely monetary accounts receivable.
You can always calmly resolve financial problems without harm, without changing the rhythm of current production, using an efficient and modern way– financing through a factor. However, as in any transactions and contracts, factoring has its pros and cons. The main benefits are to create favorable conditions for the debt to be repaid.
Enterprises that have resorted to factoring can get out of the financial crisis. The disadvantages of factoring are the complicated terms of the contract, and risking too high an interest rate, you can lose the profit from the supply. In addition, the documentation is not easy to issue.
Some positives and negatives.Watch a video about what factoring is in simple words:
Factoring can rightly be called the driving force of trade. It is not a luxury, but a tool that stimulates the growth of production and sales - increasing the competitiveness of goods and expanding the circle of partners, providing them profitable terms payment. This is a powerful financial tool with which the business of companies can increase their sales very quickly.
Final goal individual entrepreneur or companies - receipt (in the largest volume and in the shortest possible time). The speed of the transaction also plays a significant role in extracting profit: sometimes, due to a few missed days, you can lose most of the expected profit or miss the opportunity to establish a strong relationship with a new business partner. The seller is usually ready to sell products by default; Another thing is the buyer, who, no matter how interested in the goods, does not always have the amount necessary for the immediate conclusion of the contract.
It is clear that it is unprofitable to take a loan for the sake of concluding one transaction, but one cannot count on it. It is wiser to take advantage of factoring - the mediation of a third party who is ready, under certain conditions, to pay for the goods for the buyer. About the use of factoring, its varieties and the rules for choosing a factoring company or bank - see below.
In simple terms, factoring is a way to conclude a transaction and draw up a contract for the sale, maintenance or provision of services with the involvement of borrowed funds provided by a third party: a bank, an enterprise or an organization.
Important: in accordance with Article 824 of the Civil Code of Russia, factoring is one of the types of contracts for the assignment of a claim. Its main difference from a cession is the irremovability of “actors”: the creditor at any time remains the creditor, the borrower remains the borrower, and the intermediary remains the intermediary.
Like any financial transaction, factoring requires a contract. In the contract of sale, provision of services or maintenance, it is possible to prescribe the involvement of a third party, but a mere mention will not be enough: in the event of disagreements between the parties (in any combination), a separate document will have greater legal force, drawn up in compliance with all the required formalities. It is he who will need to be used in attempts to pre-trial settlement of the situation or when filing statement of claim to court.
Advice: if the seller or buyer does not want to enter into a contract with a third party, they can try to raise money by exploring or other options for raising funds that do not burden counterparties with additional agreements.
In accordance with the terminology adopted in domestic law, when concluding a factoring agreement, the following definitions are used, enshrined in the mentioned article of the Civil Code:
In the most general case, the factoring scheme looks like this:
Important: when preparing for the signing of the contract, the factor has the right (or rather should) ascertain the reliability of the other two parties: the seller, who simultaneously assumes the role of a creditor and financial guarantor, and the buyer. The easiest way to do this is to request documents on the rules of delivery and payment, as well as on past cases of delays and non-payments by the consumer.
However, even if the parties conspired and misled the "intermediary", he will not lose the spent funds: depending on the circumstances, he may or, having proved the existence of fraudulent actions, demand in judicial order compensation from both parties, or insist on the return of the money invested by him in the transaction, based on the terms of the contract. Such variability is possible, since it is not of interest to a third party who exactly will compensate him for the costs: the consumer or the supplier.
The factoring agreement must contain:
The contract for the provision of factoring services must be certified by signatures and seals or stamps of all parties to the transaction: if the seller, buyer or "intermediary" could not declare their agreement with the terms of the contract, but the fact of the transaction took place, it will be necessary to prove the legal force of the document on the basis of invoices, payment and other relevant papers. This is more difficult and longer than spending time signing a document.
Important: to certify the contract, it is not necessary to print it. The parties can use qualified digital signatures, which can slightly reduce the burden on the offices of companies or individual entrepreneurs.
Varieties of factoring
There are several types of systematization. The first of them (in order of interaction between the parties) includes two types of factoring services:
- Open. The most common option, which involves the conclusion of an agreement between commercial structures: both the seller and the buyer, and the financial agent are individual entrepreneurs or legal entities responsible for non-fulfillment of obligations under the contract and Russian legislation. The cooperation scheme is fully consistent with the above: the parties enter into a tripartite agreement, the seller delivers the goods or provides the service, receiving part of the money from the buyer and the main one from the factor, after which the consumer repays the debt to the financial agent within the specified time.
- Closed. In this case, the seller attracts the money of the "intermediary" without the knowledge of the buyer. The latter, not participating in the signing of the contract for the provision of factoring services, in fact receives a small delay in payment, and at the end of it returns the funds in full to the creditor without interacting with the agent.
The second type (according to the distribution of commercial and insurance risks) also implies two options:
- No regression. The financial agent assumes all risks and costs, including those associated with pre-trial settlement of disputes with the buyer, filing a claim with the court and further proceedings.
- With regression. It is more beneficial for the "intermediary", because, in accordance with the terms of the contract, he receives the right to demand repayment of the debt from the seller if the buyer neglects his obligations or cannot fulfill them for objective reasons.
The third type - according to the start time of the factoring agreement:
- Preliminary (consensual). The buyer assumes debt obligations, and the seller cedes to the factor the right to recover the debt even before the main contract (purchase and sale, provision of services, and so on) enters into force. It is often practiced, however, it is associated with increased risks for the consumer and, therefore, the “intermediary”: the first, in case of dishonesty of the supplier, will have to prove his case and put forward new requirements, and the financial agent will have to wait all this time for the repayment of the debt.
- In fact. The contract for the provision of factoring services, at whatever point in time it was drawn up, enters into force after the seller has fulfilled its obligations towards the buyer, and sometimes even after the latter has paid his share of the payment. A safer option for a financial agent, since at the time the debt arises to him, the consumer already has the opportunity to verify the quality of goods or services.
The fourth type - by countries of presence:
- Interior. All participants in the transaction are residents of the same country; accordingly, contractual relations between the parties develop in a single legal field (and there is no need for correlation).
- External. The provision of factoring services is carried out at the international level. It does not matter whether all parties to the contractual relationship or only one of them are in different jurisdictions; only the compliance of the terms of the transaction with the norms of international and local legislation matters.
The fifth type - by the number of financial agents:
- One factor. The most common option: both the seller and the buyer enter into an agreement with the same “intermediary” and fulfill obligations to him in exchange for a short-term provision of borrowed funds.
- Two factors or more. A complex scheme in which the supplier involves one agent (or several), and the consumer - another. The more parties to the transaction, the more difficult the procedure for drawing up a contract for the provision of factoring services, so it makes sense to resort to this option if one "intermediary" cannot provide the required amount or the seller and buyer do not strongly trust each other.
There are other ways to classify factoring - for example, by the use of electronic or paper documents or by the specialization of the intermediary firm. However, these criteria are only details that do not affect the scheme for providing Money under the conclusion of the transaction, and therefore it makes no sense to engage in further transfers.
Pros and cons of factoring
Advantages of attracting a factor (or several factors):
- The ability to conduct transactions without making a deposit. All that is required from the consumer to receive the goods is to deposit 10-30% of its value to the seller's account. In the future, he returns to the financial agent the amount previously provided by him: the remaining 70–90% plus, depending on the terms of the contract, a percentage for services.
- Simple conditions for receiving the service. Since the return of funds to the financial agent is guaranteed by the concluded tripartite agreement, and, with greater forethought, by the obligations of the seller, he does not have to worry about the safety of the money provided - therefore, the lending conditions are changing for the better.
- The opportunity for the seller to use the funds received from the agent in full. In this case, it is not necessary to keep the balance on the account, as it should be when receiving a loan.
- Seller Guarantees. Attracting for a small fee factoring company or bank, the supplier usually shifts to him not only the worries associated with receiving money from the borrower, but also gets rid of the need to pay income tax from his own funds; the latter often happens when the seller has already delivered inventory to the buyer, and he does not have time to transfer the required amount to the account of the creditor's post before the deadline for paying the tax.
- Maintaining a neutral internal balance. Factoring services do not belong to the field of lending, which means that they in no way affect the CI of an individual entrepreneur or company.
- Attracting new customers through the formation of more advantageous offer, implying the provision of installments.
Disadvantages of use factoring services:
The need to involve financial agents in transactions was discussed earlier; here it makes sense to list again the situations in which the use of factor money is especially useful:
- Urgent need to attract borrowed working capital. This applies to the greatest extent to the sphere of small business, which is experiencing a colossal tax burden and not spoiled by profitable credit offers.
- The primary task is to attract new customers and retain existing ones. It is more convenient for many consumers to receive goods in installments, initially paying a small part of their cost, especially in the context of a permanent financial crisis. Factoring allows the seller to approach the matter from a new angle, without risking their own money and without wasting time communicating with creditors.
- The buyer is unreliable or the supplier has not previously dealt with him. It is difficult to say whether the factor will agree to provide money under such circumstances, but, having found a suitable financial agent, the seller, without burdening himself with the conclusion of an assignment agreement, transfers to him the receipt of money from the consumer.
- Mismatch in the scope of activities of counterparties. If a small business supplies or purchases products to an industrial giant, it is likely that their payment schedules do not match. Factoring allows you to get rid of this inconvenience by leveling the gaps in time: the creditor receives payment for the goods immediately and in full, and the consumer can pay for the delivery without urgent withdrawal of working capital.
Important: in accordance with domestic practice, factoring services are not used for mutual settlements between branches of the same enterprise, as well as for repayment of existing credit obligations.
How is factoring different from a loan?
Features of factoring services in comparison with lending:
- More short time debt repayment, usually up to 12 months from the date of its occurrence.
- The borrower does not need to provide collateral.
- The amount of funds provided is not fixed: it is determined by the supplier himself.
- An agreement with the factor can be concluded on an indefinite basis: the seller will receive the required amount each time the invoices are submitted - without reissuing documents.
- The debt is repaid not by the recipient of the money, but by a third party - the consumer.
How to choose a factoring company?
Factor selection criteria:
- orientation: some financial agents provide funds for transactions in only one area; others, usually larger, are universal;
- reputation: do not deal with a frankly unreliable or badly reviewed "intermediary", even if he offers more favorable conditions for the use of working capital;
- price: not only the buyer, but also the seller has to pay for convenience - which means that it makes sense to find a more economical option.
Important: an entrepreneur who is afraid to trust factoring companies should pay attention to banks that provide similar services. These include Sberbank, VTB 24, OTP Bank and other major Russian financial institutions.
Summing up
Factoring is the receipt of funds for a transaction from an agent with the subsequent repayment of the debt by the buyer. In this case, the seller himself pays in favor of the factor remuneration for the use of its services. The contract can be bilateral or tripartite, concluded on more or less long term or even be indefinite.
The advantage of factoring is the ease of registration of commercial relations and the terms of payment that are comfortable for the client. Disadvantages - relatively high interest rate and the need to provide information about the buyer to a third party. The use of factoring services does not affect credit history supplier and consumer, and also does not imply the need for collateral.
In order to run a business without interruption, an enterprise often has to raise funds through unsecured lending. Today it is most profitable to do this under the terms of factoring. However, before resorting to this type of loans, it is very important to understand: what is factoring.
Factoring is, in simple words, a kind of unsecured for organizations that provide their customers with goods or services subject to deferred payments. Such financing is usually provided to companies. The use of the factoring mechanism allows many companies to maintain their uninterrupted economic activity, compensating for the cost of supplying raw materials, finished products, as well as carrying out certain works without prepayment. Also, it is this mechanism that allows many firms to simplify their accounting and expand activities as needed without attracting long-term loans.
There are only three parties involved in a factoring transaction. Schematically, their functions in a factoring agreement can be represented as the following table:
These roles will be distributed among factoring participants, regardless of the scheme of the transaction.
Distinguish closed factoring, in which the organization provides customers with goods or services with deferred payment, taking from the bank short term loan on the basis of the receivables that have appeared (this type is the most common) and open factoring, in which the debt is completely transferred to the bank, respectively, the buyer of the product or service has to pay directly to this organization. This type of factoring is less popular.
Also in international practice there are:
The terms of factoring are significantly affected by the risks of the participants. If the transaction is executed with a recourse, then the supplier may lose part of the financing if the debtor does not pay for the goods or services on time. In this case, the factor has the right to transfer unpaid invoices to the supplier with a claim for reimbursement. Under such conditions, the risks of factoring increase significantly. If we are talking about factoring without recourse, then the supplier does not depend on the solvency of the buyer, since the problem of non-payment is completely taken over by the intermediary. Consequently, the risk of non-payment for the goods is reduced to zero, while the debt is collected by the factoring company independently.
In addition, such types of factoring as tender factoring, which is provided for companies that have won a contract for the sale of products or carrying out certain works, as well as guarantee factoring, in which financing is not given to a company providing goods or services, are highlighted.
In the first case, the factoring scheme differs depending on how aware the participants in the transaction are. With open factoring, both the buyer and the supplier are aware of the presence of the factor, which is reflected in the shipping documents. In this case, the debtor settles with the bank to which the debt is fully assigned. With a closed type, the agreement between the supplier and the factor is confidential. The payer transfers the payment to the creditor according to the standard scheme, while the supplier returns it to the intermediary.
For a better understanding of the factoring scheme, let's look at specific example open factoring:
This example shows the steps of factoring closed type. In the same case, if the parties work according to an open scheme, the creditor receives from the bank 100% compensation of the amount for goods or services, respectively, the last stage in this scheme is missed.
The effectiveness of factoring lies in the fact that its mechanism allows the supplier to significantly reduce their risks. It is important that when receiving funds under the factoring scheme, no collateral is required. However, the benefits of factoring are not limited to financing alone. The intermediary takes over many other functions related to the management of receivables: keeps records of payments, controls the maturity, provides accounting and statistical management of debt, prepares financial statements. Getting rid of additional workload allows the company to concentrate on its core business. Thus, the use of factoring can significantly reduce organizational costs. As for the buyer, he has the opportunity to receive an additional deferred payment, as well as agree on a convenient payment schedule.
However, if we analyze the reviews, we can conclude that there are also disadvantages of factoring. First of all, this concerns the high cost of services, as a result of which some companies prefer credit. In the event that buyers consistently pay on time, which ensures the rhythm of deliveries and payments, then the involvement of a factor is inappropriate. Less attractive factoring with the right of recourse.
