Factoring is the assignment to a factoring company of receivables (unpaid debt claims) that arise between counterparties in the process of selling products on a deferred payment basis. We can say that today factoring service is a complex service, since within the framework of it the supplier also receives accounting, legal, and insurance support.
Who needs factoring
Factoring as a method of financing business activities is used mainly by small and medium-sized businesses operating on a deferred payment basis. This is due to the fact that small companies are often limited in obtaining bank loans and often experience financial problems due to late payment of receivables. Factoring is effective primarily for manufacturing enterprises and wholesale organizations that produce and sell consumer goods.
Benefits of factoring
The use of factoring operations helps to speed up settlements and save the company’s working capital. Thus, factoring as a method of financing a business gives the supplier the following advantages:
reducing the company’s financial risks;
the possibility of timely receipt of funds at the expense of the factoring company;
transfer of management of accounts receivable to a factor firm;
the ability to receive from the factoring company full information about the solvency of debtors;
the ability to plan cash flows.
Thanks to all of the above, the company’s financial position becomes more stable, and the company is freed from the risks of non-payment on the part of debtors. This allows the supplier to focus on other current business challenges.