What is factoring and how to use it for your own purposes?

To conduct business is rather difficult.

Even if you found a free niche, even if you wrote an impeccable business plan, even if you collected a capital investment, even if there were no problems with launching the startup, still in the process of work you will continually face big and small difficulties.

One of the most common is the resulting debt from customers and partners because of their late payment for the goods or services you provide.

You can easily get rid of such a problem if you find out what factoring is and how it can be used to promote your own business.

As you can see, today's topic is very interesting, especially for those who have a business or just going to launch it.

And when did I offer you uninteresting topics?🙂

Simple explanation of factoring

If we use the abstruse language of terminology, then the definition of factoring sounds like this: a set of financial services related to the deferral of payment transactions provided to producers and suppliers by a bank or an expert company.

To understand what factoring is, it is much easier if you look at the origin of the word.

Factoring occurs with the English word factor and is translated literally as an intermediary.

That is, a third party enters into the financial transaction between the seller and the buyer.

What is it for?

In order not to slow down the capital and turnover in business.

For entrepreneurial activities it is quite natural for the scheme of work "goods or services now, but payment in 3 days / week / 10 days / month".

Everything seems normal, but often the buyer does not fulfill the terms of the transaction, delaying payment.

If it's a matter of a few days - it's not deadly. And if it stretches for several months, it can lead to sad consequences for the supplier.

Explain by an example what is factoring

Imagine that you import from abroad fashionable boots in large quantities.

They take a few large stores for you to sell.

And now one of these stores promised to pay in 3 days, but for two weeks pulling the cat for a causal place and promises not fulfilling.

You do not have enough capital to go to buy the next shipment of goods, but your other consumers have paid and are not going to wait until you sort out your debtor, they need the goods immediately.

What will they do?

Find another supplier.

And you generally will remain without customers and will be on the verge of financial collapse.

It is in this situation that a factoring company comes to the rescue, which pays you the bulk of the debt of the buyer, so that your business does not slow down its course.

Naturally, banks and specialized firms are not free.

And what kind of altruism can we talk about in business?

But where is it better to lose a small amount than to go broke, right?

Three parties that participate in factoring

To better understand what factoring is, you need to understand which parties are participating in the equipment.

If two parties are involved in the usual sale and purchase transaction: the buyer and the seller, then during the factoring transaction, another party is added-a bank, a credit institution or a special factoring company.

That is, the three sides of a factoring operation are:

1. Factor( a specialized firm or a factoring department in a banking organization).
2. Customer factor( lender, supplier of goods).
3. The customer( the buyer of the goods).

Benefit from factoring, which each side receives

In fact, each of the parties to participation in the transaction gets its benefits:

• A factoring company earns a percentage of the transaction.

  This percentage can be from 5-25%, depending on the complexity of the transaction itself, payment terms and so on.

• The lender can focus on his business, and not engage in shaking debt from the debtor.

  In addition, the commodity and capital turnover of his business does not slow down, keeping a fairly intense pace.

  What is outsourcing and what is it good for business?

• The customer's profit from the factoring transaction is minimal, because he somehow has to repay his debt, the bank will take care of it.

  The only thing he gets is a grace period to pay the whole amount.

What is factoring: how does the

itself work? The scheme of factoring is extremely simple:

1. The factor, acting as an intermediary, provides 75-90% of the amount in payment for the goods to the lender.
2. The seller transfers the goods to the buyer, specifying the terms of the deferral for payments.
3. After a while, the factor pays the lender the remaining 25-10%, keeping its interest for the transaction.
4. After a while, the debtor pays all its debts.
5. Everyone is happy, especially a lender whose business continues to grow.

What is acquiring?

The actual factoring transaction takes place in three stages:

1. Preparatory work.

   The factor collects information about the lender, conducts an interview with him to see if he is ready to act as his mediator or not.

   Banks will not agree to participate in financially unfavorable deals.

2. Registration of all necessary documents.

   A factoring company is not some kind of a left-wing credit institution with an office in the basement, so the cooperation agreement and other accompanying documents will be processed carefully.

3. Actually the very conduct of the transaction and the control of all its stages.

Types of factoring that businesspeople can use

In practice, several types of factoring are applicable:

1. With financing of , when the creditor grants the factor the opportunity to receive subsequent payments from the debtor.

   It is usually paid to him only 85-95% of the total amount, and the remaining interest is withheld in the account, in the event of claims from the debtor( buyer).

2. Without financing , the creditor immediately provides the invoice to the factor immediately after the shipment of the goods to the buyer.

3. Open.

   The lender warns the debtor before the start of the transaction that it will be conducted with the participation of the factor.

4. Secret.

   The buyer is not informed that the factor is involved in the case.

5. Without recourse.

   The least risky kind of factoring for the seller, because the factor company is obliged in any case to pay the buyer's debt in a certain period of time, even if the debtor did not pay in time.

6. With right of recourse.

   A factoring company can return unpaid bills to its customer if the buyer refuses to pay off the debt.
   This is an "endangered kind of factoring".

7. Internal.

   All financial transactions are carried out in the country in which all participants in the transaction are registered.

8. International.

   Borders of transactions are expanding.

What is the difference between credit and factoring, and what is the advantage of the latter?

See in the video:

What are today the prospects for factoring?

This phenomenon has long gained popularity in Europe and the United States.

Domestic entrepreneurs recently also realized how much the risk of conducting transactions is reduced if the third party is the mediator in them.

Over the past 5 years, the range of services provided by factoring companies has significantly expanded.

Now they lead the accounts department of their clients, advise them, provide legal, transport and other assistance.

Every entrepreneur should know what is factoring in order to use its advantages for his business.