Factoring - what are these simple words? Types of factoring

In the economic literature unfamiliar words are often found. For example, factoring what it is and how to understand this term, not everyone knows. And this concept has been known since the 17th century. Factoring that this is in simple words, what functions it has, into what types it is shared, this article will tell. To begin with, let's define the concept.

Factoring - what is it?

One of the types of trade and commission actions that combines lending to a client with the assignment of the supplier of the outstanding payment (for the delivered goods or the provided service) and the right to demand settlement on them. As a result, this complex of services provides for the receipt of money according to a payment receipt, as well as lending and a certain guarantor of credit and currency risk.

Types of factoring

1. External factoring.
2. Internal factoring.
3. Factoring with regression.
4. Factoring without recourse.
5. Open factoring.
6. Closed factoring.

External and internal

In the first case, the factor and the client themselves are agents of different countries. In the process of servicing this type, an indirect factoring scheme is applied - responsibilities are distributed between companies evenly. In this case, the supplier-seller undertakes the process of organizing and financing the export supply, and the buyer is responsible for the execution of all possible credit risks and the direct collection of debts.

In internal factoring, all parties to the relationship, according to the purchase and sale agreements, as well as the factor itself, are registered in one country.

With and without recourse

So, in the first case, the party that has not received money from the buyer may, within a certain period of time, claim it from the supplier. Immediately, the factoring company undertakes to assume all liquid risks, and the obligations associated with the loan will remain with the supplier.

With a non-regressive view, the risk of non-payment from the debtor in its entirety passes to the factoring company, and as statistics show, this scheme is practiced in many countries. Management of factoring in this regard is somewhat simpler.

Outdoor and indoor

In the first case, the potential buyer is informed that a person, a factor, is involved in the purchase and sale transaction, and the funds are credited to his account, realizing the obligation in accordance with the supply agreement.

With closed factoring, the debtor is not informed of the assignment. Payment is made directly to the supplier, which redirects it to the asset factor. World practice shows that these types of factoring without recourse in most cases are open, and with recourse, there can be both closed and open forms.

Factoring Functions. Financing

All types of factoring perform such a function as providing financial resources to the supplier for the product on the day of its delivery or on another day specified in the contract. Simply put - products that come from a supplier come with a deferred payment.

Such a financing function in factoring has its advantages, namely:

• the supplier itself does not reimburse the amount paid, since the costs of the factor are reimbursed from payments of the actual buyer;
• the financing process lasts for the period in which the supplier sells its products;
• financing will be increased at times, due to the growth and increase in sales.

The described function, in accordance with factoring, frees the supplier himself from the problem of where to get working capital, and this goes without a corresponding increase in credit debt. Along with this, financing within the framework of factoring is somewhat cheaper than loan and factoring. The example described above is more targeted than a loan. In this case, the company pays interest only for the actual period of time during which it uses finances.

In this aspect, it can be noted with confidence: factoring, which is in simple words, a type of financing with collateral, which directly depends on the price of monetary claims assigned to the factoring company, namely on the amount of the buyer’s debt to the supplier. This concession is bought by a factor, but is not used as collateral, and therefore a change of ownership is taking place in these relations. This feature is especially relevant for countries with economies in transition and an imperfect regulatory framework. Laws on bankruptcy of legal entities not codified, security at the level of the law of transactions is not developed properly, and trade standards do not work in full. When the supplier goes bankrupt, the factoring company does not lose its finances, since the right to claim the supplier’s debtor passes to it itself, and is not withdrawn if the bankruptcy procedure is activated.

Answering the question "factoring, what is it?" this category can be noted as financing within specific limits. This is a more profitable procedure compared to standard lending. So, the risk of non-refund of money in this case lies with the buyer, and the creditworthiness of the supplier is not so important compared to the buyer. That is why the use of factoring is so popular when the customer is a large company both at the level of domestic and foreign ownership.

Accounts receivable management

Factoring, along with all the advantages, allows you to get rid of routine work - there is no need to compile reports and remind all payments to your debtors. For the most part, a factoring company, at the request of the supplier, provides a full report on all available debts on the debit, plus data on receipts from the supplier and all payments of each buyer.

Also, in the unsecured form, it is precisely the factor that will assume the obligation to collect the debt from the debtor. This is especially true for small companies that do not have a large resource regarding collection, while significantly saving labor and material funds.

Assessment of solvency of a specific buyer

In particular, in countries and states in which a credit bureau is not as well developed as we would like, this function is not very popular. If we talk about countries with economies in transition, then the factoring company itself will play the role of a credit bureau, absorbing all the data on the discipline of a particular payer or a specific company.

Along with this, it is precisely factoring companies that are able to apply all kinds of techniques for assessing the potential buyer’s ability to pay debts.

Credit Risk Acceptance

Insurance of risks that are directly related to the delivery of a specific volume of goods and in deferred payment. There is a risk of non-receipt of payments from the buyer within the agreed time, for this reason the seller himself begins to have problems with a lack of financial resources to settle accounts with his suppliers.

If we talk about factoring, which is in relation to its own advantages, it’s enough to note that the mechanism presented is important for legal entities, whose access to borrowed funds is quite limited. In this regard, its advantages come to the fore, namely:

1. Factoring does not require a pledge in its original understanding and therefore is available precisely to small and medium-sized enterprises that are just starting in a particular field of activity.
2. When factoring, there is a 100% targeted use of money, while in accordance with standard procedures, the company has a minimum balance in the account. In this regard, the result of such an action is that the borrower pays the loan more than is determined formally by the rate. When factoring, this situation does not occur.
3. It is factoring that helps to save on profits. So, according to the new law on taxation, the tax itself is levied “upon implementation”. Simply put, from the part of the actual shipment of a product. At the same time, if the company gives the buyer a deferral of payments, the financial means for the delivered goods arrive a little later. In fact, it turns out that the obligation to pay tax on existing profits arises somewhat earlier than the money received from the sale of the product. Factoring is the measure that avoids such a disagreement in transactions.

Entities that are most often parties to factoring

• Fast-growing enterprises.
• Companies without collateral.
• Companies with a majority of their receivables in assets.
• Companies specializing in seasonal services and products.
• Companies specializing in the implementation of large projects, and for which the due date plays a big role.