Factoring or how to solve the problem of receivables
This approach to financial management is an effective alternative to obtaining a loan and is particularly relevant in situations where borrowing is difficult for any reason.
The advantages of factoring are its speed (in practice, such agreements are made much faster than lending agreements) and the absence of the need to provide collateral.
Factoring can also be used if the company does not have a very good credit history. Factoring schemes are especially relevant for small and medium-sized businesses.
Factoring for small businesses is applicable in situations where the supplier and buyer are settled on deferred payment terms. This time lag between the shipment of a product or service and payment can be up to several months. Most often, this situation occurs when the supplier has a limited choice of contractors and cannot dictate its terms regarding payment terms (for example, the consumer of small enterprise products is the only industrial giant in the region).
As a result, the working capital of the supplier company “freezes”, which becomes a factor that complicates the conduct of business, leads to “cash gaps” or even technical default.
In such a case, it is advisable to resort to the mediation of a specialized financial company or a commercial Bank. After entering into a factoring agreement, such an intermediary receives the right to recover the resulting receivables from the buyer.
The intermediary company (referred to as the “factor” in the specialized literature) transfers 70-90% of its amount to the supplier at the time of occurrence of the receivable. Usually, the payment takes no more than 2-3 days, during which the relevant documentation is issued and provided: acts of completed work, invoices, invoices. The supplier receives the remainder of the amount minus the factor’s remuneration after the intermediary collects the receivable from the buyer.
In addition to receiving money quickly and increasing the speed of funds turnover, factoring is also convenient for the supplier because debt collection is actually controlled by the factor. This saves the supplier a lot of paperwork, reduces the burden on their Finance Department, and saves time.
Greater availability of factoring in comparison with credit is provided due to the fact that the factor company in this case receives additional guarantees in the form of rights to receivables.
In the process of selecting the factor you should pay attention not only to the cost of services but on the reputation of the company, its standards work with customers, skills of leadership, willingness to provide individual conditions. In turn, factoring companies also analyze the activities of contractors.
Most likely, the management of the factor firm will want to review the financial position and statements of both the supplier and buyer companies, assess their solvency and possible risks. To do this, you can request the company’s balance sheet, profit and loss statement, and other documents. A period of 1-2 years of firms ‘ activity may be considered.