Factoring is an alternative for companies to outsource the management of invoice collection with their customers and obtain liquidity from them.
Three parties are involved in this type of contract: the "assignor" company requesting the factoring requirement, the factoring entity or "factor" and the "debtors, i.e. the customers of the initial company".
The operation under this contract is that the assignor assigns its invoices for collection to these factoring entities so that they manage the collection, while they also advance the amount of such invoices.
In short, it is to be financed by the invoices that your customers must pay you for your sales.
What is recourse factoring and non-recourse factoring?
Factoring can be done in two ways, with recourse or non-recourse factoring. In factoring with recourse, it is understood that the debtor is going to pay the factoring entity and, if the debtor does not do so, the assigning company should return the amount it had advanced to the entity. If the factoring is without recourse, the assigning company, in the above case, would not be obliged to return the amount advanced to the entity if the reason for the non-payment is due to the debtor's insolvency.
Why choose factoring to finance your business?
Advantages of factoring:
1. Reduction of administrative costs
The main reason for companies to hire an entity to manage their invoices is the reduction of costs involved, both in terms of personnel, administrative tasks due to the possible issuance of promissory notes or bills, activities related to collection management, claims and litigation. It is therefore a great time saving for the assignor company that hires this service.
Financing and availability of immediate liquidity.
In addition to the savings that this service entails, companies generally seek to obtain liquidity in advance, if required, with the factoring line that is opened when the contract is established.
Thanks to factoring, companies can collect their invoices at the same time, also avoiding the uncertainty of collection that can be generated by having the credit risk covered by the factoring entity if the non-recourse factoring modality is contracted.
3. Allows to ensure cash flows and improve the company's ratios.
Thanks to factoring, it is possible to advance the collection of invoices, charging the amount from the moment the invoice is generated, with the exception of the management fee for receiving this service and the financial costs associated with the advance.
The way in which these financial flows are accounted for also improves the balance sheet ratios of companies in the non-recourse mode, not only as a liquidity tool, but also as an accounting tool.
4. Outsourcing of invoice collection management
The factoring service is an external service to manage the collection of invoices so you will avoid having this service internally. The company will not have to allocate any resources to this type of operations, so complex in many occasions, and you will also avoid conflicts and possible claims, achieving a better relationship with the client.
5. You will have continuous financial and commercial advice
In the cases of factoring, the entity, before accepting us as a client, and before accepting the assignment of the invoices, will make a study of us and our client portfolio. This in itself is already a financial and commercial assessment of the client structure.
6. Particularly interesting for companies with customers abroad.
Factoring is a very interesting service for companies with clients abroad. By having transactions with different countries, with very different payment and interlocution systems, it can mean a great saving of resources.
