Have you ever dig down what is factoring in business mean? By principle, business needs capital to generate revinue & profit.But always it is not to fund total investment cost for the owner.Factoring comes into these with immediate funding soliution.
Factoring is a range of services that includes:
Factoring services are suitable for companies working with their clients on a deferred payment basis. This type of service is one of the main opportunities to support small and medium-sized businesses (SMEs), since in this segment entrepreneurs cannot always resort to traditional credit sources of financing offered by banks. Factoring is required for those companies that want to quickly receive funds to close emerging cash gaps, solve current business problems, increase turnover, etc.
The supplier enterprise transfers to the factor company a part of the financing invoices against the assignment of a monetary claim. That is, during factoring, the management of accounts receivable (interaction with the debtor to pay the debt) is transferred to the factoring company. Thus, there are three parties involved in the transaction: the seller, the debtor, the factor.
What Is Factoring In Business
In General,factoring in business is to manage your risk by engaging third pary investor in exchange of a profit margin agreed earlier.
The factor company, having received invoices from the supplier, expects payments from buyers and takes over all the processes of managing accounts receivable. At this stage, the timing of factoring is set. The factoring company pays off the buyer’s debt to the supplier (usually up to 90% of the transaction amount).
The debtor conducts all negotiations on the repayment of debts from the factoring company, to whose account he transfers the payment on invoices. Under the terms of factoring, the factor then transfers the remaining percentage of the transaction to the supplier minus the cost of service.
A partnership has been established between the factor and the retail network, which simplifies the process of processing a factoring transaction:
deliveries are financed upon confirmation by the network.
Confirmation is a strategic agreement between the Factor, the Buyer and the Supplier, on the Buyer’s confirmation of the fact of receipt of goods and services.
Lack of collateral. Unlike companies providing factoring services, banks require obligatory tangible collateral (raw materials, fixed assets, goods, etc.) to issue a loan. In case of factoring services, receivables act as collateral.
Loyalty of requirements to the supplier company. To make a decision on financing, the factor-firm takes into account not only the potential of the supplier. More attention is paid to the solvency of debtors.
Flexibility of the scheme of work. When applying for a loan from a bank, the company receives funds in a lump sum or according to the schedule and pays the debt according to the established scheme. Financial factoring does not imply such tight deadlines – the funds are transferred to the supplier upon shipment of products, that is, almost in proportion to the volume of sales, and repayment occurs at the time of payment by debtors.
No risk of non-payment by debtors. According to the terms of service for factoring without recourse, all risks associated with a possible refusal of debtors to pay are assumed by the factor. Thus, the supplier not only receives financial support, but gets rid of the need to manage accounts receivable and control the timeliness of payments.
Possibility of active business development. Guaranteed financing for factoring, together with competent management of accounts receivable, allows the supplier to rapidly increase the company’s turnover. That is, having received money immediately after the shipment of products, the company can timely purchase raw materials and equipment, modernize production, etc. The entrepreneur gets the opportunity to concentrate on the key issues of business development, while the factor takes over the entire routine of interaction with the debtor.
The Main Types of Factoring
Speaking about what factoring is, it is worth mentioning its two main types. Recourse factoring is suitable for companies confident in the solvency of their customers. If a factor does not receive money from debtors within the agreed period, he has the right to demand these funds from the supplier. In non-recourse financial factoring, all risks of non-payment by buyers are borne by the factor. In this case, a thorough assessment of the debtors’ solvency is carried out. This factoring method is suitable for companies that are not confident in their suppliers or who are starting cooperation with new customers.
There are also such types of factoring as open (with notification of debtors about the transfer of debt to the factor) and hidden (without notification); domestic and international; guarantee (factoring without financing); tender (to finance the won contracts); purchasing (reversible, when the debtor is financed) and pre-delivery. As well as conferencing, which includes factoring and EDF between three parties to the transaction.
Why SMEs choose Life Factoring
For several years in a row, Life Factoring has been holding leading positions in terms of the total number of customers and the annual growth rate of the customer base. We work with MBS representatives. More than 4,000 companies have already chosen us! Among the clients of Life Factoring are enterprises operating in various industries and offering:
- food products
- consumer goods
- transportation services
- goods for the holidays;
- petroleum products, etc.
We have funded over 1,200,000 consignment notes for SMEs, individual entrepreneurs and startups. For many years, not only federal retail chains have been cooperating with us, but also the largest online stores.
Examples of Using factoring. Network providers
Factoring is suitable for small and medium-sized businesses that work under deferred payment contracts. Example:
Large chains take goods on terms with different deferred payments. Using factoring, you receive up to 90% of the invoice amount immediately after shipment. We take over the management of accounts receivable, which helps you concentrate on your business. After the network pays 100% of the delivery amount under the general agreement, we guarantee the return of the remaining 10% minus the commission due to us.