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What is Factoring for companies?

He Factoring for companies is a financial instrument that Its objective is to advance the collection of invoices issued by a company to a customer. The collection of these invoices will be assumed by a financial entity that will advance the money thereof to the company in question and will ensure that the client makes the payment in the stipulated time. In addition to the collection, the financial institution will provide a series of financial services to the company that will undoubtedly be beneficial for its tasks, such as knowledge of the solvency of its clients or the external management of invoices.

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advance credit

Outsourcing of administrative tasks

Investigation of clients to determine their solvency

Risk coverage for non-payment in the case of Factoring without recourse

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How does factoring work?

He factoring is a financial resource in which a company agrees with a financial institution let it take care ofthe collection of invoices that are generated from their sales, in exchange for certain advantages that the financial institution guarantees to the company.

In the first place, the company can receive the money from the invoices in advance, the management of the administrative tasks that this entails becomes part of the tasks of the entity that provides the service and also, since it is necessary to carry out a study on the solvency of the clients to be able to face these invoices, the company will have the information on whether its clients will be responsible with their payments or not.

There are different factoring types, which will bring a series of benefits and others to the company that uses it, depending on the type of contract that is made. These types are:

  1. Without resources: In this type of contract, the financial entity that assumes the management tasks also assumes the risk of non-payment by the client's suppliers. Therefore, it is a very advantageous situation for the company requesting the contract, since it is completely free of risk.
  2. with recourse: It works in the same way as non-recourse factoring, except that in this case it is the company that assumes the risk of non-payment by its suppliers, and the financial institution is only in charge of the initial tasks of collecting and managing the invoices.
  3. Secret: This type is carried out when the company that requests the credit does not want to lose credibility with its clients and then the identity of the company that requests the collection of the invoices remains totally anonymous.
  4. National: It is the case in which the company requesting the contract and the suppliers to demand the payment are within the same country.
  5. International: This type of factoring is carried out when the company requesting the credit and its client to be charged are in different countries

If we are faced with the case that it is an SME that requests this type of credit, the financial institution will only accept it in the case of clients of large companies, that is, that the invoices of the SME have to be paid by a larger company than the credit applicant.

In addition, the credit will be granted for the total or partial amount of said invoices, depending on the applicant's case, while the financial institution will proceed to collect from the debtor company when the invoices are due.

Advantages of Factoring

  • Advance payment of invoices
  • Administrative tasks managed by the financial entity in charge of Factoring
  • Study of the solvency of the clients to determine if the collections of the invoices can be carried out
  • In the case of carrying out a factoring contract of the "non-recourse" type, the company issuing the invoices has a risk coverage for non-payment