Have you ever had liquidity problems in your company? If so, you are not alone, and we know that things can get complicated at any moment . However, the positive news is that you can use financial factoring.
Imagine there is a possibility whereby a company sells its accounts receivable. Which means that it sells its invoices to an entity in exchange. Fresh money that it can use to pay its outstanding expenses.
There is no doubt that it is a source of financing that you can use to get through a crisis. Do you see it with us?
What is financial factoring?
Let’s start by defining what financial factoring is. It is a source of financing in which companies maintain their activities and even grow by selling their short-term receivables, allowing them to maintain their cash flow and operations.
To achieve this, you must go to a factoring company that gives you the amounts in the account on credit and charges a percentage that is defined at Namibia Phone Numbers the beginning of the agreement.
In other words, the financial institution purchases the client’s accounts receivable and advances the amounts in exchange for a small percentage of the final amount.
To access this financing model, all documents such as invoices, receipts and promissory notes must be valid and it is important that the client approves the operation.
Why is financial factoring important?
Overcoming the economic crisis is one of the most important challenges that companies face today. Liquidity is like oxygen for humans ; we only realize it when it is no longer there.
Therefore, having the possibility of accessing a source of financing. That allows obtaining payment for outstanding invoices is a wonderful help in dealing. The unforeseen events that the market currently presents us with.
In this way, general managers decide to resort to financial factoring. They realize that the income will not be sufficient to cover all the operating expenses. The company has or when additional capital is needed to start a project.
This way you get immediate liquidity so that the company can stay afloat despite the circumstances.
All of this has an impact on the corporation’s brand image and reputation. Which is essential to have expectations of a solid future.
6 Types of financial factoring
There are several types of factoring that exist today. Let’s look at some of them in detail: By the way the business is implemented
1.First of all we have the way in which the business is implemented and we find customer factoring.
It is also known as traditional factoring. Where the factor acquires the invoices or accounts receivable of the company through a direct request.
In this way, the factor or supplier sells Austria Phone Number List their collection rights to the factor and the latter provides them with the financing that was promised.
We also have supplier factoring. Which usually happens when a large buyer creates a relationship with the billing company so that customers receive their money immediately.
This is very useful to ensure the corporation’s credit payments and enrich the relationship between the parties.
2. Responsible solidarity
Secondly, we have responsible solidarity. Where we ensure the solidarity of the factoring party and where the factoring party does not assume any risk for non-payment of the right to credit.
3. Collection from the buyer
For its part, the collection of debts from the buyer is the responsibility of the factoring company, so the debtor has to pay the company directly through a check or with the payment method that they have agreed upon.
However, in some cases, the supplier may agree with the factor to collect the debt from the client and then reimburse the recovered amount.
4. By type of collection
Now, if the interest is overdue. The customer pays the interest on the due date along with the full amount of the accounts receivable.
6. By location
Finally, we have location factoring, where the buyer and the supplier are located in the same nation, while when it is international, both parties are in different countries.
Infographic: Types of financial factoring.
Financial factoring modalities
Parties involved in a factoring process
In the factoring process, three different actors are usually involved: the entity that specializes in financial factoring, the institutional client, and the business client that needs financing to maintain the operations of its project.
Let’s see in detail below:
1. Factoring company
First we find the company that specializes in the factoring process and purchases credit rights through the assignment of accounts receivable.
The company provides advice to the client to help him understand all the steps he has to follow to get the money. It will tell him how legal it is, when he will get the money and who he has to contact to finalize the project.
2. Supplier
For its part, the supplier is the company that sells the products and services. But during the financial factoring process, it is positioned as a corporate client that requests financing from a factoring entity.
It is also known as factoring, transferor or seller.
3. Buyer
Finally, we have the person who purchased the service on credit. Known as the buyer, debtor or issuer. As long as they receive the object of the transaction according to the agreement reached with the supplier.
5 Advantages of factoring
There are many advantages that financial factoring offers us. Some of them are:
1. Facilitates financial management
First of all, factoring represents a very interesting way to level out income flows in extraordinary situations such as a drop in sales. Mass resignations or internal problems within a company. So in critical times it is an alternative that we cannot ignore.
With this mechanism you will be able to use assets in a more efficient way without generating more liabilities or debt. In fact, in some cases we have seen how factoring offers tax benefits that you cannot ignore.
2. Reduce collection cycles
Through factoring you have the possibility of selling on credit to your clients and obtaining immediate returns. However, for this to happen you have to consider the percentage of commissions to pass on to the consumer.
Otherwise, the mechanism is very likely to turn into financial losses and not the profits you would need to earn to maintain the company’s operations.
3. Adaptable to the reality of each company
One of the reasons why we love financial factoring is because it gives us the possibility of accessing different types of services:
Portfolio management.
Accounting and reporting.
Debt collection management.
Risk coverage.
Risk analysis and definition of customer lines.
Resource transfers.
4. Quick access to capital
On the other hand, factoring gives you the possibility of taking advantage of all the business opportunities that exist in the market thanks to the fact that you get the money almost immediately.
It is only a matter of completing all the steps of the process to receive the full amount, which will help you meet your pending commitments.
5. Brand strengthening
One of the most important elements of any company is its brand image , and when there is a bad perception, customers gradually start to move away until there comes a time when the company finds itself without users to sell to.
This can occur for reasons as simple as failure to pay a supplier , failure to serve business partners, mistreating the human team or lowering product quality to save resources.
So, by having the surplus capital you will be able to meet all your obligations, which will demonstrate that the project is solid and you are ready for new business challenges.
5 advantages of financial factoring
Disadvantages of financial factoring
One of the mistakes we make when analyzing economic proposals is that we focus on the positive points and neglect those red flags that could affect the project’s operations in the medium and long term.
Let’s face it, when it comes to money, it’s essential to be as impartial as possible in order to make the best decision, not the one we like the most.
In this sense, financial factoring is a very interesting alternative, but it is important to assess its negative points. Some of them are:
1. Need to pay a commission
The first thing we find is that we have to pay a commission to execute the financial factoring , something that is not always convenient, especially if we are in a situation of economic crisis.
Factoring companies always charge an interest rate to use the service, and in the case of traditional entities, they do so through a fixed amount . For digital or Fintech companies, on the other hand, the percentage is determined on a personalized basis, which helps to choose the option that best suits our situation.
That is why it is essential that you review all the conditions and terms of the contract before signing.
2. Increase in unnecessary expenses
This has nothing to do with factoring, but with the administrator as such who does not prioritize the project objectives .
So, avoid falling into this trap under any circumstances. It is just a matter of having a work plan so that you can optimize your resources to the maximum.
Final Recommendations
The truth is that financial factoring is a more than interesting alternative to get out of debt and meet the commitments that we must meet to obtain results.
There is no doubt that in times of crisis we have to be as creative as possible. Well, if we see that we can negotiate the accounts receivable for money immediately, we will have a greater chance of obtaining positive results.
Turbulent times will come one way or another. The important thing is to have a strategy for the future and value every penny that comes into our accounts, so we will be closer to success.
Are you ready to take advantage of the benefits of financial factoring?
