Financial Glossary: What is factoring?

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Factoring is an alternative for companies to outsource the collection of invoices from 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 these invoices to the assignor.

In short, it is financed by the invoices your customers have to pay you for your sales.

What is recourse 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 would not be obliged to return the amount advanced to the entity if the reason for 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 contract an entity to manage their invoices is the reduction in 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-saver for the assignor company that contracts this service.

2. Financing and immediate liquidity availability.

In addition to the savings that this service offers, companies generally seek to obtain liquidity in advance, if required, with the factoring line that is opened up 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 secure 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 operation, which is often so complex, 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 cases of factoring, before accepting us as a client, and before accepting the assignment of invoices, the entity will carry out a study of us and our client portfolio. This in itself is already a financial and commercial assessment of the customer structure.

6. Particularly interesting for companies with customers abroad.

Factoring is a very interesting service for companies with customers abroad. By having transactions with different countries, with very different payment and interlocution systems, it can mean a great saving of resources.