Factoring: what is it and how to use it effectively

Domestic companies engaged in the sale of goods often face a problem where when selling their products only by prepayment it is possible to scare off the majority of buyers, and when applying a deferred payment the seller is deprived of a significant amount of money in circulation that is necessary to finance business activities. The specified problem allows to solve such concept, as factoring. What is this procedure, and how can it be successfully used in the functioning of the business entity?

In accordance with the current legislation, this concept means financing under the assignment of rights to a monetary claim. The factoring contract is often called sales credit. Today, this procedure is carried out mainly by banks because they have such a right in accordance with a special law.

However, any credit or commercial organization can carry out factoring. What is factoring? This is an activity that must be confirmed by an appropriate license. But today, no normative document has yet been adopted that would regulate such licensing.

Usually the calculation of factoring is carried out according to the following scheme. The enterprise concludes a contract for the provision of services with a financial agent, which is designated in this document as a factor. In accordance with this agreement, the seller, when selling the goods, does not immediately receive payment from the buyer for it, but concedes the right to demand this payment from the buyer to this financial agent. What is interesting, the supplier does not bear any responsibility for paying the buyer money to the agent. The seller must notify the buyer in advance that, in their interaction, factoring is used, that such an action implies the interaction of the second person with the bank.

So, the documents are presented to the banking institution, which must confirm the actual supply of goods or the provision of services with the condition of payment by installments. And already on this day the seller receives about 70% of the contract value. The value of interest depends on the reliability category to which the given buyer will be attributed by the bank. The higher it is, the more amount the supplier will receive.

When the due date for payment is reached, the buyer must transfer the funds directly to the bank. In case of non-payment in a timely manner, such a mechanism as factoring begins to operate. What is the impact of the bank implies by itself, we will consider further. The Bank carries out a number of actions aimed at recovering funds from the debtor. If the debt is repaid successfully, the bank pays the supplier the remaining value of the contract minus the commission (about 3%), levied as a payment for the provision of such services.

Summarizing the above, it should be noted that the supplier company using factoring has the opportunity to sell its goods with a delay (which is significant for the buyer). However, the seller does not withdraw a significant part of the funds from the turnover.