What is factoring and what are its advantages and disadvantages?

[jrineakter]

We recently wrote that the average invoice payment period is 79.4 days, that 44% of SMEs have outstanding invoices and that, of these, 11% say that they will never collect a tenth of their sales. Unfortunately, this situation can lead to bankruptcy for too many companies.

Above all, it is small and medium-sized companies that are forced to close due to non-payment or delays in the collection of their invoices. Can anything be done to avoid this? Fortunately, yes, and without having to resort to traditional bank loans. Factoring is an interesting method to finance yourself with your own invoices . An option that allows you to have liquidity without having to assume banking risks. Below we will see what factoring is and what its advantages and disadvantages are.

What is factoring?
Factoring is a financial transaction through which a company transfers the invoices generated by its sales to a company (usually a bank) that will be responsible for managing the collection. In iran number data exchange, the factoring company will offer the amount of the transferred invoices, less a percentage of commission.

Let's take an example. The company Indret has made a sale to the company Luca and therefore sends him an invoice due in 30 days for 10,000 euros. By signing a contract, Indret assigns it to the respective bank, which immediately gives him 9,000 euros, 90% of the total amount of the invoice. Now the bank will have the rights to collect and, therefore, the company Luca must pay the bank 100% of the invoice directly. Thus, the bank will get the 10,000 euros and, as a result, will have earned 1,000 euros.

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Factoring modalities
There are two types of factoring depending on the coverage of the risk of non-payment:

With recourse
In this case, the bank does not assume the risk of non-payment and can take action against the company that assigned the invoices in the event of non-payment by the customer. The bank will take all extrajudicial and judicial measures to ensure collection. However, in the event that it is impossible to collect, the bank will return the invoices to the assigning company and recover the amount advanced.

This is usually the most common option, unless the company is very large and has a very good credit rating.

Without recourse
In this case, the bank is responsible for the risk of the client's insolvency, and cannot take action against the transferor company if there is a default. This means an increase in the cost of the operation, and therefore the commission for the bank will be higher than in the previous modality.

Advantages of factoring
1. Immediate liquidity
The most obvious advantage is the availability of immediate liquidity. We have already seen that the average payment period between companies is almost 80 days, well above the legal deadline. However, it is difficult to resolve this situation, since initiating a claim procedure is not always an easy task.

Related article: Monitoring procedure to claim unpaid invoices

Thanks to factoring, invoices can be collected at the same time they are issued. It is true that a commission will be applied and, therefore, the company will not collect 100% of the invoice. Therefore, the need for liquidity must be assessed, as well as the due dates of the invoice or the complexity of collection.

2. No debts are generated
It is simply an exchange of collection rights between the transferor company and the bank, and no debts are generated. Thanks to this, if the company needs to request a loan at a specific time, it will be able to do so without being affected by the factoring, since it will have obtained the necessary liquidity without going into debt.