Factoring or “factoring” allows companies to obtain the repayment of their receivables without waiting for the payment periods to lapse. How does this method of financing and debt collection actually work? What are the benefits for the company? Explanations.
What is factoring and what are the different forms?
Factoring is aimed at all companies, although SMEs use this technique for generally smaller amounts than large groups. This market allows a company to receive an advance payment of an invoice by assigning it to a financial institution named “factor”. From an accounting point of view, this method is therefore for the company to take invoices receivables from its balance sheet to turn them into cash.
This method of financing can take many forms. Classical factoring involves the company giving up its invoices to the factor in return for immediate financing. It is particularly suitable for small structures. This financing technique therefore has several advantages over the discount that is not available to start-up companies, but also in relation to bank overdraft or securitization.
There are other less known forms
Among them is unmanaged notified factoring, which is more relevant to companies with a significant turnover. In this case, the structure transfers the notified receivables to the financial institution but is responsible for internally relaunching and collecting the customer invoices. The advantages for the company are numerous: the ability to control the customer relationship from A to Z, benefit from a cash advance or maintain certain transparency with customers.
Then, confidential factoring allows a company to maintain the management of the receivables while the regulations are financed by the factor. However, in this situation, customers are unaware of the existence of a contract between the company and the factor. In the case of reverse factoring, the company mandates the factor to pay its suppliers in its place which allows it to benefit from a commercial discount and pay it at the normal due date. Finally, factoring import-export concerns companies that develop internationally with a similar operation to conventional factoring. This last technique allows the company to outsource the management of the international customer, to consolidate and secure its orders.
How does factoring work?
The factoring contract is based on a tripartite relationship between the supplier, the factor and the customers. More concretely, it works as follows: the company that subscribes to the factoring contract sells products or services to its customer then sells the invoice to the factor who becomes the owner. The latter makes a cash advance to the company and finances it in a timely manner. The customer of the company at the origin of the factoring contract must pay his invoice directly to the factor.
The factor takes care of the recovery of the invoices. In the case of unpaid bills and depending on the nature of the contract, the latter may assume the losses or claim the amounts due to the company. The credit institution can also offer a credit insurance contract to guarantee payments. By subscribing to credit insurance, the company secures its receivables, guarantees its receipts and can obtain financial information on its partners.
Why choose factoring?
Factoring has several advantages for the company. It is first and foremost a financing tool that enables it to improve the management of its operating cycle by ensuring the rapid settlement of its receivables. This helps to increase the company’s cash flow and reduce the need for working capital. Indeed, cash is a key element since it is used to pay salaries and suppliers. Thanks to this operation, the company does not need to resort to the bank loan.
Then, this technique allows the structures to lighten their administrative burden because it is the factor that ensures the functions of monitoring and recovery of invoices. By delegating these tasks, the company reduces its financial costs and saves valuable time.
Another related to the use of factoring deserves to be emphasized
The elimination of the risk of unpaid bills. The factor can offer its client credit insurance that guarantees up to 100% of the purchased receivables. The factoring company Rose Credit Leasing Factoring offers, for example, a complete solution to companies to optimize the management of their receivables and allow them to benefit from the financing of the invoices transferred, the management of settlements and the recovery of receivables as well as credit insurance to guard against the insolvency of their clients.
Factoring, however, has certain limitations to be known among which include the lack of flexibility of certain factors and the cost of this service. Thus, the establishment of such a contract requires to study in advance the additional costs that it generates for the company. It may be wise to compare offers from several companies to get the most out of this technical product.