The concept of factoring and its advantages
Factoring is represented by a set of services associated with the provision of deferred payment. This kind of mediation in which the mediator belongs to the factoring company or Bank. This is the company for a stipulated fee and receives the right to claim and credited to the account of the seller of amounts of money that is owed to them from customers.
The scheme of work within the framework of factoring transactions are as follows. The seller ships the goods to the buyer and transmits the accompanying delivery documents to a factoring company (invoice, bill of lading). It pays 90% of the value of the goods supplied. And after receiving the debt from the buyer, and transfers the remaining funds, minus their own fee.
The popularity of factoring services is due to the fact that the provider receive money for goods shipped and he didn't have shortage of working capital. Moreover, the seller has the ability to reduce risks associated with deferral. In particular, such as currency fluctuations, fraud, non-payment of goods, inflation, etc. of the Factoring companies also carry out professional work with debt, and can also take appropriate measures to return the debt. They check the business reputation of customers and monitor the status of your debt.
Classification of factoring transactions
Factoring can be classified on various grounds. From the point of view of a region of the transaction they are divided into internal, when all the parties to the transaction are in the same country and the international when one of the parties is a resident of another country.
There are also open and closed factoring. In the latter case, the buyer does not know about the participation of a factoring company in the transaction. Open factoring transactions are not of a confidential nature.
It is possible to allocate operations with recourse or without such right. In the first case, the factoring company has the right to claim from the lender compensation in the buyer's refusal of payment. Contract without recourse almost never occur.
The types of factoring transactions
Based on the scheme of factoring, we can distinguish such types of operations like screening of suppliers, financing transactions, debt management and covering the risk of default.
Before any factoring operation carried out preliminary verification of the supplier and buyers. Thus, factoring company insures itself against possible risks of fraud. Based on the analysis of potential debtors is determined by future funding limit, this is also done to identify unscrupulous buyers.
Key factoring transaction is a funding transaction, whereby the vendor has the ability to replenish working capital, and the customer to delay payments. It is for this and are turning to a factoring company.
The factoring company manages the receivable, it helps to improve the payment discipline of the customers and to avoid delinquency. Transfer this operation to the outsourcing provider has economic advantages compared with separate units.
Service to cover non-payment risk means that the provider gets paid regardless of income from the debtor, and the risks of non-payment incurs a factoring company. This operation is not required.