The essence of monetary factoring, if you drop complex terminology, is the beneficial partnership of two parties, one of which is a bank or a commercial organization. A simple scheme works by the principle: the partners conclude a contract, and the bank ensures the inflow of money in those cases when the direct profit from the transaction has not yet arrived.
What is factoring?
Factoring is a simple service that allows business relationships to exist within the law. For a person who does not understand the intricacies of banking operations, such assistance is incomprehensible. What are the purposes of factoring - a simple, profitable debt recovery contract for debtors includes:
- bank loan without collateral;
- assessment of customers' solvency;
- insurance of risks associated with the refusal of the buyer;
- settlement of accounts receivable.
Co-operation on the basis of factoring allows companies with little money turnover to remain afloat for a long time, which is necessary for the correct activity of the entire enterprise. So, the issue of ensuring the activity of a production or a firm is being solved with a deficit of personal funds of the company itself.
How does factoring work?
The essence of factoring lies in the work of three full-fledged contractors. The sequence of each of them is clearly defined by the terms of the contract:
- The company (factoring) provides services or sells goods to customers.
- The company provides documents for the consideration of the bank evidencing the existence of debt to debtors.
- The bank pays most of the company's debt.
- The bank and the company make up a contract whereby the debtor returns the money directly to the bank with additional interest accrued.
A simple scheme ensures the uninterrupted production or sale of goods until the debt is repaid in full. So a company with a limited personal financial balance, provides the process of its development at the expense of funds provided to it for temporary disposal by the second party (the bank).
Factoring and forfeiting - differences
Factoring and forfaiting are focused on the needs of buyers. The scheme, which allows you to pay off debtors' debts, works without pledge obligations. Forfaiting involves repurchasing a debt from a lender and paying it off. The difference in schemes for attracting a third person is that factoring leaves the company with the right to extinguish debt in a manner that is convenient for it. The main differences between the opposite ways of fulfilling the debt obligations:
- the maturity of the debt;
- estimated risks;
- concessions from the bank;
- the fact of transmission.
The time that the operation (reverse factoring) takes not more than 180 days, but the terms of forfaiting are determined by years. The main feature of factoring is the share of debt, after payment of which (about 60% of the total amount), the debt account is frozen. The interest rate does not increase, but the company's ability to develop is much more effective and stable.
How does factoring differ from a loan?
Often people who do not face factoring before, confuse this type of financing with lending. Completely different in structure of monetary operations really help the enterprise with debts, but they do it in completely opposite ways. The difference between factoring and credit:
- Ways of repaying the debt . Loans taken under the responsibility of the enterprise in the bank are extinguished directly by the borrower, but factor financing is formed from receivables.
- Terms of debt repayment . Credit relations have a clearly defined term and do not depend on the growth of the company's income. Factoring in different situations depends on a deferred payment in real time.
- Interest payment date . Under the loan agreement, the debtor makes the necessary sum not later than a certain number of each month, but the money for factoring is credited on the date of payment of the debtor.
- Execution of the contract . To obtain a loan, a private or an individual needs documentation, which can be very difficult to collect. Factoring uses simpler documents - invoices or checks.
- Interest . The commission for factoring is fully included in the cost price, but there is no credit interest.
- Additional services . A bank that has drawn up a loan agreement for an enterprise does not provide services that are not included in the general package. The schemes of open and closed factoring expand as necessary.
Each separate type of bank loan has its own peculiarities, advantages and disadvantages, but for conditions that arose with a large debt of the enterprise, factoring is the main alternative to unprofitable lending. The objectives of factoring are obvious - to simplify the debtor's monetary problems, but without loss for the lender (financial enterprise).
Factoring - the pros and cons
Modern factoring is a universal way to deal with debts without harm to the current production. The terms of repayment of the debt by the bank may differ, and the benefits from such cash transactions are not always obvious. Each contract concluded with a banking organization has its advantages and significant shortcomings, which should be known in advance.
Factoring Benefits
The advantages of factoring, available to every wealthy company or individual, are to create favorable conditions for the payment of arrears. In addition, the enterprise that resorted to factoring can get out of the crisis or money problems. Simplification of work with debtors is another undoubted plus of similar operations.
Factoring - cons
The disadvantages of a young, but effective service of the bank, include complex terms of the contract. Unprofitable tariffs, and a high interest rate literally "eats" the enterprise's income from the supply of products. The disadvantages of factoring are in the complex documentation and reporting to the bank. The operation of repaying a loan to a debtor does not involve one-time transactions, and the minimum number of payments reaches 10.
Types of factoring and their characteristics
Types of factoring, which have proven themselves as effective ways to pay the company's fixed debts:
- financed operations;
- open and closed factoring without financing;
- cash operations for repayment of open and closed debt (regressive factoring);
- reverse factoring with the right of recourse and without it;
- domestic and international operations.
When concluding a factoring contract (open and closed factoring), the supplier of the goods inferior to the bank (financial institution) the right to receive current accounts and pay them. So the bank takes on temporary obligations to finance the development of the company, charging a certain percentage of the future amount of debt in its favor.