Competition in product markets and services markets causes the occurrence of more flexible relationship between the supplier and the buyer. Decline in prices, improvement of goods and services quality, expansion of the commodity nomenclature, organization of free delivery, bonuses, etc. – only some of measures which the supplier is forced to resort in modern conditions in an effort to find and retain customers.
Commodity loan is beneficial to all market participants: producers, distributors, and retailers. By investing funds in building distribution channels, most trade companies are now able to increase sales volumes in times with the help of the relevant commodity, so a trade credit is now becoming a major development tool for companies.
However, the limiting factor of commodity credit is a need for supplier to invest significant funds in accounts receivable, as well as to organize issues of managing credit sales, starting with one to whom to sell, how to monitor the payment transfer, what to do if the buyer does not pay, etc. Therefore, the construction of credit sales not only requires investment in working capital, but also a significant amount of resources spent on building a special technology. An alternative to the independent development of commodity credit is factoring.
Factoring is a complex of financial services provided to the companies – wholesale suppliers of goods and services, which has an indefinite term and strategic interest, for both parties. The purpose of factoring is to encourage sales growth.
The essence of factoring is to offer three types of services to trade, manufacturing and service companies: financing of working capital, covering a number of risks that may occur in the course of trade operations and administration of accounts receivable.
Each company seeks the ways to develop and increase their sales. However, limited financial and organizational capabilities of most suppliers constrain them in the implementation of these goals. Factoring is intended to solve a number of the following tasks for companies which sell their products on a deferred payment:
- to expand the share of supplier company on the market;
- to improve the liquidity of receivables;
- liquidate cash gaps;
- timely pay contracts and taxes;
- arrange credit sales;
- develop relationships with existing customers;
- attract new customers;
- insure the risks associated with the provision of deferred payment and other buyers.