When we find ourselves before the need to resort to a Factoring entity, it's important to have on mind What will the realization of said contract entail? to avoid problems in the future. Therefore, we have created this article for you. Let's talk about Factoring: advantages and disadvantages.
What is Factoring
factoring, is a type of financing for companies which consists of the advance payment of invoices by a financial institution. The company applying for Factoring, you will receive the amount of your invoices in advance, and the financial company will take care of that the payment of these invoices is made within the stipulated time.
The financing in this case it comes from several professional and private investors who are looking for a Good profitability in exchange for lending your savings. They themselves are the ones are made with the right to collect advanced invoices.
The financial institution also will provide a series of products for the Factoring requesting company, such as a study of the solvency of its clients, Besides the external management of invoices.
Types of Factoring
- Non-Recourse Factoring: This type of factoring refers to when The financial institution, in addition to assuming management tasks, also assumes the risk of non-payment by the client's suppliers. It is the most positive situation for the company, since it is totally free from the risk of its customers not paying.
- Recourse Factoring: It is similar to Factoring without Recourse, with the difference that in this case it is the client who assumes the risk of non-payment by their suppliers. The financial entity on the other hand, it will only be in charge of the main tasks of management and collection of invoices.
- Secret Factoring: This type of Factoring is carried out when the company applying for Factoring You don't want to lose credibility with your customers and therefore the identity of The company that requests the collection of invoices remains totally anonymous.
- National Factoring: This type of Factoring is carried out when both the company requesting the loan and the providers of said client are within the same country.
- International Factoring: In this case, Factoring is carried out when the company requester of the service and its providers are located in different countries.
Advantages of Factoring
Obtaining liquidity almost immediately
Usually, the payment process from suppliers to a company is usually quite long. There are even cases where this process extends beyond the legal limit. we all know that the claim processes in these cases are complicated as well as tedious, and that is why Factoring exists.
If the company needs to obtain the liquidity provided by the collection of these invoices, it can resort to Factoring to collect your invoices almost immediately from the moment the invoice is issued.
Although a commission is applied by the financial institution and the company does not receive the 100% of the amount of the invoices, the truth is that the need to obtain the relevant liquidity is much more important than that commission.
No debt is generated for the requesting company
Resort to Factoring It does not imply any type of indebtedness between the company and the financial institution.
Since it is a simple exchange of receivables between the client company and the financial company, no debt is generated. The company applying for Factoring will be able to borrow in the future since this factoring contract It will not appear as debt in your solvency study.
Invoice management is outsourced
The company requesting the contract, You will be able to save on resources that you previously used to manage invoices. By contracting factoring services, lto financial entity that provides the financing will assume the tasks of managing invoices, since she will be in charge of ensure that the customer's suppliers meet the payment.
You get great financial and business advice
When choosing the Non-recourse modality factoring, the factoring financial entity will carry out a study on the solvency of the client and its suppliers prior to the acceptance of the contract. This It will help the company to better understand the situation of its suppliers, in addition to the fact that the financial institution will provide financial and commercial advisory services to the client.
Disadvantages of Factoring
factoring companies, They usually charge a high commission for each operation that is always carried out based on the credit requested.. They can also be charged other types of commissions by credit maturity or by different efforts that the entity has to carry out, what is the example of the solvency study.
Even so, These interests and commissions will always be agreed and explained between both parties before signing the contract with the factoring entity.
Recourse Factoring Danger
If we resort to recourse factoring, if the factoring entity returns invoices, there is a risk of having Lost more money than expected. Thus, it would have been easier just not to collect the bill.
It can affect the image of the company
In the eyes of a client, That a factoring company claims invoices can affect the trust in the relationship between the two companies.
A company must have a stable image in the eyes of its suppliers, and sending a factoring company to deal with the collection can create insecurities about the real state of the company's economy and affect the relationship. But how everything has a solution, and that is that to avoid that we can resort to Secret Factoring.
Now that you know everything involved in a factoring contract, you are prepared to assess if it is really what you need. With Alter Finance you can enjoy a good factoring service, and have the best professionals in advice and financial management.