What is Factoring for Businesses?
Factoring for businesses is a financial instrument aimed at advancing the collection of invoices issued by a company to a client. The collection of these invoices will be assumed by a financial entity that will advance the money to the company and ensure the client makes the payment within the stipulated time. In addition to collection, the financial entity will provide a series of financial services to the company, such as assessing client solvency and external management of invoices.
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Advance Credit
Outsourcing of administrative tasks
Assessment of client solvency
Risk coverage for non-payment in Non-Recourse Factoring
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How Does Factoring Work?
Factoring is a financial resource where a company agrees with a financial entity to manage the collection of invoices generated from its sales in exchange for certain benefits guaranteed by the financial entity.
Firstly, the company can receive the money from the invoices in advance, the administrative tasks associated with this are transferred to the entity providing the service, and since it is necessary to conduct a study on the solvency of the clients to handle these invoices, the company will have information on whether their clients will be responsible for their payments.
There are different types of factoring, each bringing a set of benefits to the company using it, depending on the type of contract agreed upon. These types include:
Non-Recourse: In this type of contract, the financial entity managing the tasks also assumes the risk of non-payment from the client’s suppliers. Therefore, it is a very advantageous situation for the company requesting the contract, as it is entirely free of risk.
Recourse: Works similarly to non-recourse factoring, but the company assumes the risk of non-payment from its suppliers, and the financial entity only handles the initial collection and management tasks of the invoices.
Confidential: This type is used when the company requesting the credit does not want to lose credibility with its clients, so the identity of the company requesting the invoice collection remains anonymous.
Domestic: The company requesting the contract and the suppliers to be collected from are in the same country.
International: This type of factoring occurs when the company requesting the credit and its client to be collected from are in different countries.
If a small or medium-sized enterprise (SME) requests this type of credit, the financial entity will only accept it if the clients are large companies, meaning the SME’s invoices must be paid by a larger company than the credit applicant.
The credit will be granted for the total or partial amount of these invoices, depending on the applicant’s case, while the financial entity will proceed to collect from the debtor company when the invoices are due.
Advantages of Factoring
Advance payment of invoice amounts
Administrative tasks managed by the financial entity responsible for factoring
Assessment of client solvency to determine if invoice collections can proceed
In the case of a “non-recourse” factoring contract, the invoice-issuing company has coverage for non-payment risk