This article aims to define and typify factoring, as well as this method is effective in the management of accounts receivable. Financial intermediaries, especially non-bank and insurance entities, are described. The services and types of factoring are explained, and the advantages and disadvantages of applying them. Lastly, the structure of the use of factoring as a method of managing accounts receivable in the Sol Meliá chain is detailed, stopping at each of the links involved in this process.
Summary
The present article must like objective define and typify the factoring, as well as this method is effective in the management of the accounts to receive. The financial intermediaries, mainly the no banking and insurance organizations describe themselves. The services and types of factoring are explained, and the advantages and disadvantages that the application of such has. Finally the structure is detailed that has the use of the factoring as method of management of accounts to receive in the enterprise Sol Meliá, stopping in each one of the links that take part in this process.
We must begin by explaining that there are bank and non-bank financial intermediaries, and that in this paper we will refer to factoring as a non-bank financial intermediary method.
Among non-bank intermediaries we can distinguish:
- Non-bank financial intermediaries whose liabilities, even though they are not money, have a fixed monetary value and can easily be converted into money.
In some countries, savings institutions (savings banks, construction loan companies) that raise resources through deferred savings deposits and certificates of deposit, are usually included in this subgroup, which, being slow-moving, allow them to grant loans to medium and long term and acquire long-term fixed income assets.
Also included are business banks that raise medium and long-term resources through term deposits or issuance of banks or shares and provide medium and long-term financing to interested parties and, lastly, term sales financing companies that take credits. in the short and medium term or receive deposits to finance term sales, especially durable consumer goods.
- Insurance institutions
This includes insurance companies whose mediating function is subsidiary to their risk insurance activity. These institutions are characterized by accumulating significant reserves from the insurers' premiums, which invest in bonds, shares, etc.
Unlike the previous one, your liabilities can only be converted into money before the expected time (loss, retirement, death, etc.) with heavy losses and great restrictions.
- Institutions whose liabilities have a monetary value that can vary frequently:
It is basically the funds and investment companies that place their participations or shares, generally, among the small savers in order to obtain resources for the acquisition of securities, especially the shares.
The origins of factoring are found in the time of colonization of North America by the United Kingdom when Factors were commercial agents of companies in the metropolis.
At a later stage, which is usually located in the middle of the last century in the United States, the Factor goes from sales commissioner to dedicate itself to the collection of invoices issued by its principal.
Subsequently, the most modern modality of the figure in question (New Style factoring) was introduced gradually in Europe, in an evolutionary process that cannot be said completed, also developed in the United States and characterized, mainly, by a wider offer of services related to sales management, as well as further development of a financial nature.
Factoring: it is defined as that by virtue of which the Client will transfer all or part of his credits to the Factor in exchange for a percentage remuneration on the amount of the credits, and the latter will provide the investigation, control and collection services of the assigned credits, assuming, under certain conditions, the risk of insolvency of the Debtors, putting at the request of the Client, make an advance on the amount of the credits assigned to changes of interest.
It is a combination of risk coverage services, collection and recovery management, control of the invoice portfolio and sales financing in companies, which is supported by the commercial assignment of credits.
The factoring service aims to free production companies and suppliers from the problems posed by the collection of invoices, the risks of insolvency and administrative problems arising from the need to investigate the solvency of customers and to keep accounts specialized, even more complex problem in the case of international sales.
In practice, the factoring contract is known as a financing instrument, since, one of its most outstanding features, in the event that this service is agreed, is that the Client can obtain advances on the debited credits.
In principle, we must exclude from the consideration of factoring as a Financing Contract the rare assumption that the Factoring Company acts as a mere manager of the collection of the credits of its Client, simply collaborating in the management of the company.
The classification of this contract as a financing contract must be understood in a very particular sense. In effect, this contract is for financing, not because the funds that are granted have a predetermined destination, as occurs in the financing of installment sales or leasing, but because of the advance of funds that the term “Financing” entails. ”And for affecting, as we pointed out, the financial aspects of the client.
We must therefore insist that the legal qualification of the factoring contract is not based on the destination of the funds loaned, but simply because of the advance of those funds. It is financing because it serves to finance, not because it finances certain operations.
We can only predict credit activity, in principle, that there is financing. Even in this case, if the factoring is without recourse, that is to say if the Factor assumes the guarantee obligation, the money that you advance to your Client will not constitute a debt of this to the former, since these advances do not in any case tax the liabilities of the company that uses factoring. This is the essential difference that distinguishes factoring from traditional credit facilities.
In factoring, the advance funds must not be used by the Client to finance any specific and determined part of its assets. The factoring contract may include the option in favor of the Client of advance of funds on the assigned credits, but in no case does it establish the destination that the latter must give to them.
In short, these factoring operations are not modal, and therefore cannot be classified as financing financing operations.
The factoring operations with recourse in which an advance of funds occurs can be classified as financing if we understand the latter term in the sense of an advance as it was raised when configuring the financing contract.
Factoring Services.
- Customer credit rating. 100% insolvency risk coverage of debtors Collection management. Computerized control of the assigned invoice portfolio Collection and default management. Advice and help in the process of assignments Financing.
Export Factoring:
The factoring contract is a commercial contract, which is based on the assignment of credits. In said contract, based on the assignment of credits, the client of the factor entity (exporter) assigns or sells to the factor the short-term commercial credits (invoices) of its commercial activity and, therefore, is freed from a series of activities and responsibilities that, from that moment, are assumed by the factor (factoring services).
Factoring is not only the sale of a commercial credit in exchange for a price, but in the factor entity it provides additional services related to the credits it acquires and which must also be remunerated.
The factoring price includes two components:
- Factor Entity Commission. (In this section we summarize all the commissions) Interests
The factoring contract always implies the sale or transfer of credits in certain modalities in which the exporter is responsible for the debtor's solvency, the factor has recourse against his client (exporter) in case the debtor (foreign buyer) does not pay.
Only two parties (customer and factor) are involved in the factoring contract, although the debtor of the credit (foreign buyer) also intervenes in the relationship generated by said contract and that, in export factoring, the factor is divided into assignee and correspondent):
- Assignor or Client: is the exporter that sells (assigns) the commercial credits that have been generated in the development of its export activity to the factor. Export or assignee factor: it is the entity of the exporting country, which buys trade credits originating from the international sales of its client (exporter) and, simultaneously, provides additional services related to these credits. Import factor or correspondent: is the entity of the importing country, which acts as a correspondent of the export factor to carry out the necessary functions in the importing country. It is related to the export factor through a mutual collaboration agreement. Debtor: it is the foreign buyer of the exporter and, therefore, is obliged to pay the commercial credits that are the object of the transfer (generally, invoices).
Services Offered by the Factor Entity.
Information and credit rating of foreign buyers:
- It allows the exporter to study the creditworthiness of the debtors and assigning a risk line to each one, in this way he selects his most optimal portfolio of clients. Collection Management of the credits assigned by the exporter. Debtor: The exporter transfers all its credits by market or by product. Financing of the commercial credits assigned.
The services that can be included in the factoring contract represent a series of advantages for Client companies. These advantages can be systematized into two different categories: administrative and financial.
Administrative advantages:
- Factoring means for the Client company a simplification of the accounting tasks, since these will be taken care of by the Factoring Company. The administrative costs are reduced and at the same time a series of charges such as material and personnel expenses are eliminated, dedicated to the preparation of reports, solvency studies, market studies. This favors the control of the Treasury budget, by allowing better planning in the temporary calculation of cash inflows and outflows. Factoring is a particularly useful service for the export, since the Factor network can better assess risks and manage collection more efficiently.
Financial Advantages:
The mobilization of the loans assigned by means of their advance payment increases the cash flow of the Client company by transforming a variation of funds from the Client's patrimonial element into a Cash flow. This improvement in liquidity has two consequences:
1. Allows the client to use as a technique to increase their sales the granting of deferrals in the collection of credits to their buyers without bearing the possible negative effects that this delay may have.
It makes the client eligible for the advantages that their suppliers can offer them for the prompt payment of their purchases.
Next, we will develop an example of the use of this mechanism as a method of collection management for Sol Meliá hotels in Cuba.
The company in charge, as we have previously mentioned of the credit portfolio of all Sol Meliá hotels is Credit & Consult, C&C from now on, which is why some characteristics of it are detailed below:
It is based in Palma de Mallorca. They receive and collect information through their offices in the main cities of Spain: Madrid, Barcelona, Malaga, Seville and Santa Cruz de Tenerife; its collaborators, suppliers and clients around the world; 4 information companies and 19 law firms also have the most important database of agencies, tour operators and national and international companies.
It has relationships with more than 200 hotels worldwide, with the most important hotel chains in Spain and travel agencies around the world.
He reinforces his own experience with the constant presence in the tourism sector and with a fruitful relationship with different companies in the sector.
Computer system
C&C Credit Consult is in constant study and development of new technologies applying them to communication systems, always thinking about the benefit of its clients and accessibility to our services.
They have a personalized application for records of daily collections that allows us to:
Know the provision of the accounts of more than 4,000 clients.
Know the average collection period.
Carry out different types of analysis.
Its main activity is aimed at companies interested in information on agencies, tour operators and the tourism sector in general.
- It is dedicated to the control and management of credits and the rating classification of clients located mainly in the tourism sector. It provides you at all times with complete information on the economic and financial situation of classified clients, avoiding or reducing delinquencies and defaults. It provides you with an improvement in the effectiveness and speed of collection and claims.
Organizational structure of C&C with Sol Meliá Cuba Division.
As explained, C&C receives feedback from different sources to update the database and prepare the rating of the different creditors of the companies to which its credit portfolio is taken. In turn, in the specific case of Sol Meliá Cuba Division, there is a Risk department in each hotel, which is in charge of updating and claiming all credit billing primarily.
In addition, these departments are a mandatory reference at the time of resumption of contracts.
The organizational structure of Risks Sol Meliá Cuba Division would then be as follows:
It follows from all this that those responsible for updating the status of the loan portfolio, which makes them the primary link in this whole mechanism, are the Hotel Risk Departments, a department that is responsible for ensuring and controlling the proper functioning of financial management, which is why special attention should be paid to it.
Bibliography:
Corrales, JA; Garcia-Barbón, J - Financing, leasing and factoring companies. Editorial Civitas. 1997
Vaitilingam, Romesh - The Financial Times guides to understanding the financial pages. Editorial Prentice Hall. 2001
