What is the difference in factoring financing and crediting?

Practical information for the entrepreneurs. 

What is factoring?

Factoring is the complex of financial services provided by the Factor to the client in exchange for a concession of the requirements of the accounts receivable. These services may include:

• funding for the delivery of goods and services;
• administration of accounts receivable (regular provision of relevant reports to the client, control over the timeliness of payment and work with debtors).

What is the funding of goods supply in factoring?

Funding for the goods supply in factoring means that after the goods are delivered to the seller, the Factor pays as the funding a significant part of the supply amount. The size of anticipated payment can be from 50% to 90% of the supply. The balance (the sum of delivery minus the financed amount minus Factor’s commission) is paid out to the client on the day of receiving money from the debtor. 

What should be the minimum amount of supply for funding?

As a rule, there are no restrictions on the minimum amounts. In the course of factoring services the delivery of any (even the smallest) amount may be financed.

What is the difference in factoring financing from crediting?

Some differences between factoring and credit are as follows:

 Can factoring service lead to the deterioration in Client relations with the buyer?

Since factoring commission is a fixed percentage of the client’s turnover, the loss of any of the debtors will lead to the losses of the Factor. Realizing this, the Factor always avoids actions that could provoke a conflict between the client and its debtor, and may resort to such actions only after receiving Client’s agreement.

Who needs factoring?

Factoring is important for the company that wants to ensure the growth of the sales of its products, using working capital provided by the Factor. If the sales volume of the client grows, it will provide the growth of the funding amount from the Factor.

What information and client requirements are important for Factor when signing factoring services contract?

First of all, it is the information about the number of regular customers working with the client and the length of payment delay provided by the Customer contracts.

In addition, it is important for Factor to assess the feasibility and efficacy of factoring in each case. Factor will be trying to figure out the real purpose of using factoring by the client: whether to strengthen it own purchasing power or simple to increase funds in order to survive the hard times. It is important that customers have a clear understanding of all forms of services offered by the Factor. Client’s company, using the full range of services, regulates and speeds up the turnover of cash and instead of a wide range of different customers has one undisputed debtor – Factor. Senior employees are exempt from everyday problems and encashment issues and bad debts and can focus on the relationship of suppliers and their customers.

The company, that advantageously uses the factor services, in addition to benefits associated with these services, can also receive the support from the bank if the bank agrees to grant the loan in spite of the factor participation. Establishing relationships with the factor contributes to an increase of the purchases volume and improve their conditions, strengthens the company’s position as a result. 

Types of factoring and how do they differ?

Typically, factoring services begins with recourse factoring, when in the case of payment delay by the debtor over the grace period (plus a few days – so-called grace period), pays the supplier (i.e. Client Factor). At first glance, recourse factoring is similar to the non-recourse with the important exception that the factor does not provide credit protection to the supplier. All debts in Factor’s operations featured with full recourse to the supplier in the case of insolvency of the client, although the “recourse” factors usually provide their customers an additional service, which is to assess the creditworthiness of customers. 

Recourse factoring can be both open and hidden. 

With the accumulation of credit history by the Client Debtors, the Factor may proceed to service the debt of the ceded part (or all of the ceded receivables) without recourse. In that case, the Client (i.e. the supplier of goods and services) is not obliged to pay for any delays instead of the Debtor. Non-recourse factoring commission is slightly higher than with recourse (the size is determined individually on the basis of credit history).

It is a form of modern factoring, servicing the most of the manufacturers, distributors and service companies. It covers the management of business registers, credit management, 100% protection against bad debts incurred as a result of approved transactions, and debt collection from the clients. The combination of these services makes “urgent” factoring and can be used independently. As a possible complement, the factor typically offers to provide finance support up to 80% of the debt on the sales register. This addition makes the factoring “financial”, complementing the non-recourse factoring set. 

Non-recourse factoring can also be “open” or “hidden”. The first, which is much more common, presupposes that the supplier notifies the client that the payments should be made to the factor; the second type of factoring assumes an action, that is being taken to hide the presence of factors and instill the customer the confidence in the fact that he pays directly to the supplier.

Accounts discounting. Although, for many years it has been known as operations with debts, recently it became known as the “accounts discounting” or “confidential factoring accounts.” It is also known as accounts receivable financing.

Consignment of goods factoring. Usually, it is an open account of invoices with the provision for debtors to make all payments intended to the supplier to the Factor.

Agency factoring. Is similar to consignment of goods factoring, but provides a certain degree of credit protection. Sales are discounted to individual customers, credit is secured by the Factor, and buyers have to transfer payments to the office of the special account of the factoring company.