In the economic literature there are several different definitions of factoring, but most of them interpret it as a trade-brokering and lending operation. In other words, factoring is a combination of a commission and mediation procedures and loans secured working capital. It is associated with the supplier assignment of his rights to demand payment for goods and services of the selected company.
Factoring features
There are 3 primary function, inseparable from each other:
- working capital financing;
- collection of customer receivables;
- insurance of financial risks.
There are also a number of factoring functions.
Factoring does not involve the transfer of the collateral in the traditional sense, which enables small and medium businesses to get a relatively quick and easy access to the credit. In addition, factoring is characterized by the 100% use of funds for other purposes, in order to exclude the possibility of non-target costs and prevent permanent “hang” of the credit funds on the account.
Factoring stages
Factoring service is a complex multi-step process and each of its stages is performed by different economic and financial operations.
I stage – preparations
Initially, the factoring company collects information about potential clients, analyzes their financial condition and receivables, studies its field of activity, assesses the risk and the possibility of obtaining advance payments. Customers, in their turn, become familiar with the factoring company main features, options of cooperation and service rates. Then there is an interview, during which the client and the factor meet each other, specify and agree on the conditions of further cooperation.
II stage – documents execution
Factoring agreement is made after the policy decision about the possibility of cooperation. Its main purpose is the most complete coverage of all the issues that arise in the course of factoring transactions. All of the following issues are required to be regulated: the size of receivables transferred to the service, the procedure of transactions financing, terms of the monetary claim transfer, the price of services, the order of calculations and actions upon the occurrence of force majeure.
III stage – transactions monitoring
Transactions carried out within the framework of the factoring agreement, subject to continuous and total control. He is the guarantor of flawless performance of contractual obligations and timely flow of funds to the client account of the factoring company. Monitoring includes:
- analysis of placed assets, its compliance with contract clauses and regulatory requirements;
- assessment of the financial condition and payment discipline of the debtor;
- problem transactions control.