The main function of factoring is to provide funds to the supplier after products shipment or in day specified in the factoring contract. Thus, the supplier has the ability to deliver products to its customers with the deferred payment, at the same time receiving a significant part from the amount immediately after the delivery or at any convenient schedule. If the company aims to increase its sales, it has the ability constantly let the money in circulation and thus compete for customers with other suppliers by providing deferred payment. The supplier also knows the exact day when the money will come to his account.
In addition, financing in factoring has a number of advantages, among which are the following:
- the Supplier shall not return money paid to him, as expenses of the Factor will be reimbursed from buyers’ payments;
- funding will last as long as the supplier will sell his products;
- funding increases according to the volume of sales.
Administration of accounts receivable
Factoring allows the client to get rid of routine work associated with tracking the status of receivables and reminding debtors about payment delays. Normally, the factoring company on the first demand of the supplier gives him a report on the status of accounts receivable, which includes information on all deliveries of the supplier and its customer payments. Also in the case of non-recourse factoring the factor takes care of collecting debts from debtors, which is especially important for small companies that do not have their own resources for collection process. This allows them to save human and financial resources.
Coverage of financial risks
Factor can cover risks associated with the delivery of goods with deferred payment, including non-receipt of payment from the buyer due to his insolvency.
Coverage of financial risks in factoring (factoring without recourse)
1. Alignment with the factor of the debtor, due to which covering of the financial risk will be carried out.
2. Delivery of goods with deferred payment in usual mode.
3. Transfer documents confirming the delivery to the Factor.
4. Accounting of payment discipline of debtors by the factor and reporting on the status of receivables.
5. If debtor fails to pay the agreed amount of money, the factor pays this money instead of the debtor under the pre-agreed coverage limit.
Evaluation of creditworthiness of supplier’s customers
In countries, where credit bureaus and rating agencies are well developed, this function of factoring companies is not as popular. In countries with transition economy, factoring companies can play the role of credit bureaus and rating agencies, accumulating the information about the payment discipline of the companies. In addition, factoring companies may use different methods for assessing the solvency of potential buyers of the supplier.