It consists of the acquisition of credits from the sale of personal property, the provision of services or the execution of works, granting advances on such credits, assuming or not their risks. Through the factoring contract a merchant or manufacturer transfers an invoice or other credit document to a factoring company in exchange for a full or partial financial advance. The factoring company deducts the commission, interest and other expenses from the amount of the purchased credit.
Factoring companies are usually banks, savings banks, or other specialized companies. In addition to the financial advance, the factoring company can:
- Assume credit risk Assume exchange risk, if the invoice is in foreign currency Perform collection management Perform effective collection of credit and advise your own insurance company Advise the client on the financial health of the debtors
Factoring is often used by SMEs to meet their working capital needs, especially in countries where access to bank loans is limited. Factoring is useful for SMEs that sell to large companies with high levels of creditworthiness.
Collection policies
Credit policies should aim to maximize return on investment. Policies that grant very short credit terms, strict credit standards, and an administration that slowly grants or rejects credit restrict sales and profit so that despite the reduction in investment in Accounts Receivable, the rate of return on the investment of the shareholders it will be lower than can be obtained with higher levels of sale and Accounts Receivable.
The granting of credit results in: losses from bad debts, the cost of investigating the client's credit, collection costs and the financing of Accounts Receivable. The investigation and operation of these factors decrease the rate of return on the investment of the shareholders.
To assess credit, managers should consider:
- The moral solvency of the borrower, The financial capacity to pay, The specific Guarantees, The general Conditions of the economy The Consistency of the client The Coverage
Information is obtained from various sources including past experience. If the account is new, it is normal practice to request: audited financial statements, tax returns if there are no financial statements, solvency letters from the credit institutions with which it operates. It is usual and highly recommended practice to establish communication with other client providers.
The exchange reports reveal the formality of the client's payments, the amounts of the credit, the problems that have been experienced and also the clients that have been blacklisted by insolvent customers.
The main volume of credit sales of consumer goods are made through the open account business practice. The client is opened an account where their transactions are recorded without asking for a formal acknowledgment of their debts such as promissory notes or bills of exchange.
In case of dispute, the company has the customer's order, the invoice or against receipt, and the shipping documents, which in most cases is signed by the customer for acceptance of receipt of the goods.
In credit sales on capital or durable goods such as machinery, equipment, automobiles, vehicles, refrigerators, televisions, etc., the sale is generally documented with credits that can be subsequently negotiated with credit institutions. Charging interest on the credit granted or for lack of timely payment on the due date is a common practice.
The company will translate your credit information into risk classes.
Credit must be pulverized, it is not convenient to have a single client, it must be diversified so that the risks of non-collection do not affect the company in a significant way.
- The moral solvency of the borrower: It is a qualitative measure and represents the probability that the client will pay his obligations on time. This factor is very important: Will the client make an effort if necessary to pay their debts? Or is the client defaulting on its maturities?
The formality of commercial customer-supplier agreements has a very important meaning in the granting of credit and in business.
- Financial ability to pay: It is a quantitative measure and represents the client's ability to pay. It is examined through the client's financial information, interpreted through the financial analysis technique to know the result of the liquidity, solvency and other reasons, taking into account, where appropriate, the experience that has been obtained in commercial relationships. When the amounts are very significant, it is necessary to obtain information from the client on the generation of future cash flows to measure the client's ability to pay to cover the requested credit. Specific Guarantees: They can be constituted with the guarantees of the property itself or with other assets pledged as security for payment of the requested credit. These guarantees significantly support the requested credit.The General Conditions of the economy in which it operates: It has a special meaning and recognizes the general trends of the company or of certain areas of the economy that may influence the client's ability to meet its obligations, such as country recessions, public spending, opening or closing of borders, etc. Client Consistency: it can be said that it is the Duration, constancy and permanence of the client, in accordance with the commercial lines and activity that it develops. The Coverage: They are the Insurances that the company, or that requires its client, to compensate possible losses from bad debts.It has a special meaning and recognizes the general trends of the company or of certain areas of the economy that may influence the client's ability to fulfill its obligations, such as recessions in the country, restrictions on public spending, opening or closing borders, etc..Consistency of the client: it can be said that it is the Duration, constancy and permanence of the client, in accordance with the commercial lines and activity that it develops. The Coverage: They are the Insurance that the company has, or that it demands from its client, for offset possible losses from bad debts.It has a special meaning and recognizes the general trends of the company or of certain areas of the economy that may influence the client's ability to fulfill its obligations, such as recessions in the country, restrictions on public spending, opening or closing borders, etc..Consistency of the client: it can be said that it is the Duration, constancy and permanence of the client, in accordance with the commercial lines and activity that it develops. The Coverage: They are the Insurance that the company has, or that it demands from its client, for offset possible losses from bad debts.in accordance with the commercial activities and activity that it carries out. The Coverage: These are the Insurances that the company has, or that it requires from its client, to compensate the possible losses for bad debts.in accordance with the commercial activities and activity that it carries out. The Coverage: These are the Insurances that the company has, or that it requires from its client, to compensate the possible losses for bad debts.
The sale of accounts receivable
Accounts receivable records the increases and decreases derived from the sale of concepts other than merchandise or the provision of services, solely and exclusively on documented credit (credits, bills of exchange and promissory notes) in favor of the company and for this there is programs to carry out operations.
Therefore, it is said that this account presents the (enforceable) right that the entity has to require the subscribers of the credits to pay their (documented) debt derived from the sale of different concepts of the merchandise or the provision of services. on credit; that is, it presents a well-expected future benefit.
Discount factoring
Intelligent credit management is essential for the competitiveness and growth of today's business. Factoring is an increasingly used financial tool to provide liquidity to your company, avoid cumbersome bureaucratic procedures for opening credit lines, and allow more flexibility in credit sales to your customers.
