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Factoring or How to solve the problem of receivables

Factoring is a specific financial product that allows the company to quickly reduce the level of receivables and make up for the lack of working capital.

This approach to financial management is an effective alternative to obtaining a loan and is especially relevant in situations where borrowing is difficult for any reason.

The advantages of factoring are its efficiency (in practice, such agreements are drawn up much faster than loan agreements) and there is no need to provide collateral.

Using factoring is also possible if the company does not have a very good credit history. Factoring schemes for representatives of small and medium-sized businesses are especially relevant.

Factoring for small businesses is applicable in situations where the supplier and buyer settle on a deferred payment basis. This time lag between the shipment of goods or the provision of services and payment can reach several months. Most often, this situation occurs when the supplier has a limited choice of counterparties and cannot dictate terms regarding payment terms (for example, the consumer of the products of a small enterprise is the only industrial giant in the region).

As a result, the working capital of the supplier company “freezes”, which becomes a factor complicating the conduct of business activities, leading to “cash gaps” or even technical default.

In this case, in the calculations it is advisable to resort to the mediation of a specialized financial company or commercial bank. After the conclusion of the factoring agreement, such an intermediary obtains the right to recover the arising receivables from the buyer.

The intermediary enterprise (in the specialized literature it is called the “factor”) at the time of the occurrence of receivables transfers to the supplier 70-90% of its amount. Typically, the payment requires no more than 2-3 days, during which the relevant documentation is drawn up and provided: acts of work performed, accounts, invoices. The supplier receives the rest of the amount minus the factor remuneration after collecting the receivables by the intermediary from the buyer.

In addition to promptly receiving money and increasing the speed of turnover of funds, factoring is convenient for the supplier also because the collection of debt is actually controlled by a factor. This saves the supplier from significant work to ensure workflow, reduces the burden on his financial department and saves time.

The greater availability of factoring compared to credit is provided due to the fact that the factor company in this case receives additional guarantees in the form of rights to receivables.

In the process of selecting a factor, it is worth paying attention not only to the cost of services, but also to the reputation of the company, its standards for working with debtors, the qualifications of management, and the willingness to provide individual conditions of service. In turn, factoring companies also analyze the activities of counterparties.

Most likely, the management of the factor company will want to consider the financial situation and reporting of both the supplier company and the buyer, assess their solvency and possible risks. For this, an enterprise balance sheet, income statement and other documents may be requested. A period of 1-2 years of activity of firms may fall under consideration.

Many representatives of domestic small and medium-sized businesses initially relate to factoring schemes with some caution. The reason for this lies in a lack of understanding of the essence of this financial instrument. However, having gained positive experience working with factoring companies, suppliers are aware that factoring is an effective way to solve financial problems and increase business efficiency.

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