FACTORING
It represents the operation by which a client, called ADHERENT, transfers the ownership of its debts from commercial invoices to another entity, called FACTOR (credit institution or non-banking financial institution), in order to obtain immediate financing.
Therefore, the FACTOR plays the part of the financer. If the factoring operation represents a fast financing modality, it means that, explicitly, it generates short term credits.
The ADHERENT’s goal is to receive the invoice prices before they are due, and the FACTOR’s goal is to obtain a benefit, usually a certain percentage from the invoices that it settles in advance.
According to the nature of the contract signed by the partiers, the FACTOR may ensure the administration and receipt of the adherent’s debts.
In the specialized literature, there are several classification criteria of the factoring operations, according to: scope; payment execution moment; or participants in the factoring operation.
From the accounting point of view, factoring is classified according to the recourse right that the credit institution or the non-banking financial institution may exert on the adherent, in:
- recourse factoring - In case of non-payment, the FACTOR will recover the amounts not received from the ADHERENT by exerting the right to recourse, respectively by debiting the adherent’s current account or by capitalizing the security;
- non-recourse factoring – the FACTOR usually pays to the ADHERENT a percentage (generally around 80%) of the accepted invoice counterpart immediately after the issuance, and the rest of the money will be received within a preset interval of time, calculated from the invoice maturity date.
The factoring contract includes the following elements:
- documents making the object of factoring (invoices);
- amount that the factor puts at the adherent’ service when the invoices are handed over;
- security constituted upon financing;
- amount that the factor undertakes to pay on the invoice receipt date (unavailable factoring);
- interest demanded by the factor for the factoring operation;
- factoring fee;
The factoring operation is the following:
- ADHERENT issues invoice and delivers goods;
- DEBTOR accepts invoice;
- ADHERENT sends invoice to FACTOR;
- FACTOR finances ADHERENT with 80%;
- FACTOR performs payment to adherent (from the 80% financing, he deduces its factoring interest and fee);
- DEBTOR finances the difference (I specify that the difference will be sent to the adherent by the factor when receiving the amounts related to the invoice(s) from the debtor);
Advantages of factoring financing:
- Factoring represents a real financing solution for long payment deadlines of invoices;
- Factoring offers the possibility to increase turnover and/or execute investments;
- Factoring develops the company’s flexibility to undertake varied payment deadlines, better payment deadlines instead of smaller prices;
Practically, by factoring:
- the unpaid debts are reduced, the rotation speed of assets is increased;
- receipts may be planned per days;
- due to the permanent financing based on flow, investments may be executed anytime;
- the company’s liquidity is improved as a result of the cash-flow acceleration;
- the market extension possibilities increase, as clients will appreciate the more favorable payment conditions;
- the financial support of the company’s dynamic increase is created.
In our opinion, the present economic context, namely the world recession, will determine more and more companies to make appeal to this type of service, thus avoiding cash flow problems and ensuring themselves against the non-payment risk of their business partners.
The banks’ reticence to grant loans, the situation of the clients that will no longer qualify to access a loan, the more sensitive cash flow in crisis conditions will determine entrepreneurs to protect their business by appealing to the financial solutions offered by specialized companies.