Factoring scheme: description, types, operations

Factoring is now becoming indispensable in the commercial field. Often, suppliers of goods and services face a difficult choice: to work on a prepaid basis or to grant their customers the right to defer payment? The first option can reduce the number of potential customers of the company. The second - creates certain risks that can jeopardize all business activities. The golden mean here is the application of certain factoring schemes. This article will be devoted to them.

What is it?

Before dealing with factoring schemes, we present to the reader the definition of the main concept.

Factoring - the financing of a certain monetary claim against the assignment. This is a certain form of commodity loans, in which the rights to debt of creditors are transferred to a third party (in this case, a factor). In this case, the supplier of goods / services acquires the payment due to him sooner than was agreed in the contract with the buyer / consumer.

This term is of English origin. Here factoring is mediation.

Who can be a factor? In most cases, these are specialized companies. In the Russian Federation, factoring departments of commercial banks are more common.

Functions

Understanding the factoring schemes will help acquaintance with its defining functions:

• Provider Financing. Namely, the rapid replenishment of his capital.
• Collection of debt. In this aspect, this is a management function.
• Non-payment risk insurance (in case of specific need).

Participation of the parties

Whatever factoring scheme we consider, these three parties will necessarily participate in it:

• Factor. This is either a separate factoring company, or the eponymous department of the bank.
• Supplier of goods, services. He acts, respectively, as the customer and creditor.
• Buyer. In this situation, the debtor.

Factoring: scheme of work

We proceed to a direct explanation. The factoring scheme is most easily represented in the following algorithm:

1. The supplier ships products to the buyer. Previously, they agree on a deferred payment for it. As a rule, this is a period of a week to 4 months.
2. The supplier enters into a contract with the factoring company, transfers to her all the invoices for this transaction.
3. The factor on the invoices provided makes the payment due to him to the supplier’s account. In most cases, this is 90% of the total cost according to these documents. The remaining 10% is sent to the seller’s account after the buyer receives his goods, checks them. Of course, factoring services are not provided free of charge - the company receives a certain commission from the total amount of the transaction.
4. Buy pays for the received product / specified service after a specified time after a factor.

This is how the standard purchasing factoring scheme looks in general terms. Let's move on to the description of important points in the process.

Activity Stages

We got acquainted with the factoring scheme with an explanation. Now we present a more detailed description of the stages of this work.

Preliminary activity. Prior to concluding an agreement with a customer, specialists of a factoring company conduct an assessment and analysis of financial capabilities and the reputation of their potential client (buyer in this case).

As for the supplier, he is obliged to provide the buyer with the necessary reliable information. He also reports on the terms of payment and delivery of the goods, is obliged to inform the factoring company how conscientious the buyer was in past cooperation.

Documenting. An important point in the scheme of work when purchasing factoring is the conclusion of an agreement between the customer and the factor. The following is mandatory in the contract:

• Subject of the agreement.
• Rights and obligations of all interested parties.
• Description of the customer financing procedure.
• Lending limits.
• Description of the procedure, conditions for transfer of rights to the debt of a factoring company.
• The cost of the work of factoring specialists, a method of calculating with a factor.
• If necessary, a clause on insurance in case of violation by the debtor of its obligations.
• Duration of the contract.
• Other conditions important to the parties.

The control. The agent factoring scheme always includes this important point. Includes the following:

• Verification of the fulfillment by participants of the obligations that are assigned to them by the contract. In case of violation, accordingly, a claim will be formed.
• Verification of compliance of assets involved with documented requirements from a factoring company.
• Analysis of the assessment: whether it is necessary to change its value specified by the customer (seller) or customer (buyer, debtor).

In what cases is it necessary?

We started the article with the fact that factoring is becoming indispensable in modern conditions of world trade. Indeed, there is a situation that the intervals between the fact of shipment of the goods and receipt of payment for it are becoming more and more. Do not forget about the various force majeure circumstances in which this service becomes vital.

In the article, we presented factoring schemes with and without recourse. But in what cases is their application necessary in a business situation? Here are the main working cases:

• The need for an urgent increase in working capital. Factoring services here are more profitable than taking short-term loans. This reason is most relevant for small enterprises. For which, I must say, Russia has not yet provided for affordable and mutually beneficial conditions for short-term loans.
• Customer acquisition. In order not to miss a profitable customer, the seller wants to offer him the most favorable conditions for cooperation. But at the same time I’m not ready to wait in installments.
• Work with new customers. As a rule, it is often accompanied by unstable payment. Factoring allows guaranteed receipt of payments after the shipment of products.
• Deliveries from small companies and enterprises to giant corporations. The latter are often characterized by inflexible schemes of work with constant payment terms.
  

When is factoring impossible?

You now know how the factoring scheme works. Next, we list the cases in which the appeal to factoring companies is not possible:

• When a company simultaneously has a large number of buyers with outstanding debts.
• In relation to manufacturers of specialized goods.
• Firms whose operating procedure is as follows: invoices are not issued immediately after shipment, but after the completion of certain works.
• Contracting companies with subcontractors.
• Suppliers who work on after-sales customer service.

We also note the following situations in which the provision of factoring services is impossible:

• Making settlements between branches of the same enterprise, company.
• Repayment of debt obligations not of legal entities, but of individuals. Making settlements between budgetary institutions.
  

Key Factoring Features

We present factoring schemes for the buyer. But we will also demonstrate the key features of this service in order to show its defining differences from the loan in the following subtitle:

• Refers to short-term services. There may be a delay in payment from the buyer for only a few days. The maximum term is one year.
• The service is provided without collateral.
• It is the financing of an already developed, streamlined current activity of a company or enterprise.
• The amount depends only on the sales volume of the customer-supplier.
• From the amount paid to the customer, a fee for the provision of services by a factoring company is necessarily deducted. There are also such schemes in which the amount of debt is repaid in installments. For example, one half - before settlements with a debtor, the second - after them.
• Minimum workflow (in comparison with the same loan). In fact, only an invoice, invoices and an agreement are needed. The latter may be perpetual. That is, once having concluded it, the customer will receive financing from the factoring company after the presentation of the invoice and invoices.
• The debt is returned by a third party. That is, it is paid by the payer-buyer not to the seller’s account, but to the factor’s account.

Key loan features

Factoring services, although in some places they resemble lending, are often provided by the same banking organizations, and in many respects differ from it. We will present the key characteristics of the loan to show this difference:

• At its core, lending is long-term.
• A loan in most cases is issued only on bail.
• The loan amount is clear, agreed in advance in the contract.
• A loan is granted in certain cases for building a business, its development from scratch or low starting positions.
• When lending, the entire loan amount is issued immediately.
• To obtain a commercial loan you need to collect an impressive package of documentation. Moreover, receiving one loan from a bank does not mean at all that the next one will be provided to the loaned. Each loan is a separate agreement.
• The debt of a banking organization is paid by the legal entity or individual for which the loan was issued.

Varieties of factoring

We demonstrated factoring schemes with and without recourse. Now we will consider what factoring services are generally - we will get acquainted with their classifications.

According to the situation of debt:

• The real ones. The factoring agreement is concluded after the occurrence of debt obligations.
• Consensual. Debt obligations here are assigned in advance.

By residency of participants:

• Internal All participants are in the same state.
• External International factoring.

By the number of factors themselves:

• Direct. There is one factor.
• Reciprocal. Two factors are involved in the transaction.

According to the range of services provided:

• Broad (or conventional). There is not only financing and further collection of debt, but also accounting, insurance and other related customer services.
• Narrow (limited). The range of services of a factoring company is minimal - customer financing and debt collection.

By type of workflow:

• Traditional.
• Electronic.

Significant Benefits

Define the most significant pluses of factoring:

• No deposit required.
• Quite lenient requirements are imposed on the solvency of the supplier.
• Guaranteed uninterrupted cash flow, acceleration of this process.
• Organization of collection of the buyer's debt not by the supplier, but by a factoring company.
• The conclusion of a factoring contract is, in essence, insurance against non-payment.
• Savings on income tax, which is deducted upon the shipment of goods.
• Such financing does not appear to be a loan, which is why it does not upset the company's balance sheet.
• The ability to attract customers with a flexible payment system.

Significant disadvantages

Consider the fact that factoring is bad compared to traditional lending:

• A large amount of commission. Up to 30% per annum or up to 10% of the buyer's debt.
• The need to provide detailed customer information.
• In practice, factoring basically remains applicable only to non-cash payments.

Factoring is a rather attractive service for both small and medium-sized, large enterprises. Today you can choose any scheme of work that is convenient for you and the factor itself - a bank or a specialized company. But it is also important to keep in mind not only the advantages of such a settlement system, but also its features and disadvantages, as well as cases in which such a service is not provided.