Confirming is one of the most effective methods for managing payment to suppliers. However, there are different types and it is necessary to negotiate which one is most appropriate for the needs of your company.
The different types of contract confirming They determine aspects such as whether the banking entity offers the supplier the option to advance payment or not, who assumes the risk and who is responsible for the costs of the operation. In addition, you can also find international confirming, in order to simplify your purchases abroad.
Índice
What is confirming and how does it work?
Confirming is a financing and payment system. This is a service by which a financial institution advances the amount of supplier invoices before they become due.
Its operation is similar to factoring, only in this case the issued invoices are not transferred, but rather the received ones. For this reason it is also called “supplier factoring” or “reversal factoring”.
The company must open a “credit against confirming” line with a certain limit with a bank or entity that provides this service. When you receive an invoice and it is accepted, you present it to the bank to process your payment.
From here, different types of confirming contracts can occur. The company can choose to use this formula as a financing system or simply a payment mechanism for suppliers.
Confirming types
As we indicated in the previous paragraph, depending on the terms and conditions agreed with the banking entity, we can find different confirming modalities.
It is possible to find the so-called simple confirming, in which the bank does not finance the advance; It is only responsible for guaranteeing and managing payment to suppliers.
Furthermore, international confirming is aimed at managing payment of foreign suppliers. It can be useful if the company carries out foreign trade operations, since it offers payment guarantees to the supplier (thus improving negotiating capacity) and simplifies payments in foreign currencies.
But beyond these classifications, it is possible to contract other confirming formulas. For example:
- Confirming Prompt Payment: the client company assumes the cost of advance payment of invoices. It is usually useful when the objective is to improve relationships with strategic suppliers. It is also possible to negotiate a discount for prompt payment with the supplier.
- Confirming Funded: In this type of confirming, the supplier is also not offered the possibility of advancing the amount of the invoices. The supplier is paid on the due date. However, the client company can finance said payment over a certain period.
confirming example
Suppose that a company decides to negotiate a confirming contract with a bank or entity that offers this type of services.
It is worth noting that alternative financing entities usually offer greater flexibility when negotiating the conditions of a confirming contract. The rigidity of traditional banking sometimes does not allow the company to adapt financial products to its real needs.
The point is that this company chooses the confirming formula for 3 reasons:
- Managing payments to international suppliers is time-consuming and ineffective.
- Foreign suppliers require guarantees in order to give you a discount.
- Furthermore, if you make payments in cash, the discount obtained can be interesting and cause a significant increase in the profit margin. Savings on purchases are reflected directly in the income statement.
What type of confirming should I hire?
If you manage a simple confirming, will solve the problem of guarantee and payment management, but it does not have the option for its suppliers to opt for an advance payment to obtain a reduction in the price of . Therefore, the appropriate formula is a standard international confirming.
There is a key question that the company must ask itself. Will suppliers be willing to pay fees and interest for advancing invoices?
Probably, if you offer this option you will not get the discount for cash payment. So you decide that you need a Confirming International Prompt Payment.
With this confirming modality, the supplier is offered the possibility of advancing invoices without having to assume the interest and commissions of the operation. He assumes them himself.
However, the discounts achieved thanks to the payment guarantee of a financial institution through confirming and the option to advance invoices exceed the costs of confirming. This is an ideal solution.
This is simply an example of how alternative financing can help you. You can consult with Alter Finance to determine what type of confirming or financial tool may be most appropriate for the needs of your company.