FACTORING OR FACTORING IN A COMPANY: KNOW ALL. In the business world, the invoices of commercial exchanges between the actors are not systematically paid. A payment deadline is often provided to ensure their settlement. While waiting to collect all debts, in the day-to-day management of a company, problems of working capital requirements may arise.
Several solutions exist to solve these cash flow problems and the use of factoring is a possible option. This is a solution intended to quickly finance the company’s cash flow to avoid all risks. Here is a general overview on this particular funding system.
What is factoring or factoring?
Also called factoring, factoring is a financing technique that consists of assigning trade receivables (invoices) to a financial institution to manage the cash flow of its business. This technique therefore allows a company to receive, in advance, the amount of its trade receivables without waiting for the payment due date.
The establishment that supports this financing is also called the factor, the factor or the factoring company. The latter is then responsible for carrying out collections and thus guaranteeing the proper payment of the debt.
Standard or classic factoring
By this classic form, the company hands over its receivables directly to the factor, who immediately pays the corresponding amount. All this, for a percentage intended to feed and increase the guarantee fund. Debtor customers receive a notification of the signing of the factoring contract to settle the debt with the factor afterwards.
Unmanaged or semi-confidential notified factoring
By this method, although the customers are informed of the factoring operation, the factor does not take care of the recovery of the receivables. It is content to finance the treasury of the company which retains the collection mission.
Reverse factoring or reverse factoring
This method is similar to that of traditional factoring except that the initiative comes rather from the debtor. The latter asks the factor to settle the debts with his supplier. Subsequently, he will take care of reimbursing the factor.
Import factoring and export factoring
These two types of factoring are reserved for companies that work with partners abroad. Export factoring is the same as standard factoring except that the customers concerned are not located in the same country as the company. With regard to import factoring, the contract allows the company to obtain supplies from suppliers located abroad who are paid before the due date of the receivables.
Corporate factoring: how does it work?
Factoring concerns companies operating in B2B and, for the classic method, the operation is quite simple.
When customers place orders with the company and agree to pay later, the factoring contract is made with the factor. For this, the company is asked to provide all the necessary information on its debtor customers. Thus, their contact details, their SIRET numbers (if they are companies) as well as the amount of outstanding invoices are transmitted to the factoring company. The ownership of the receivables of the company’s customers is therefore transferred to it as soon as the factoring contract is signed.
Then, the factor pays the company an average of 90% of the amount including tax of the receivables. The remaining 10% corresponds to the guarantee fund as well as the management fees. The guarantee fund allows the factor to protect itself against non-payment of debts by customers. This fund is returned to the company upon payment of receivables at the end of the contract or in the event of breach of contract.
In addition, the factoring contract gives the power to the factor, after notifying the customers, to recover the payment of receivables from debtors from the management of customer accounts. Also, factoring obviously has a certain cost that the company is required to pay to the third party company. These are mainly:
- Factoring commissions which depend on the size of the company, the amount of the invoices, the turnover, etc. ;
- Funding commissions.
The percentage of these different commissions is negotiated with the factor.
Why factoring to recover your receivables?
The main advantage of factoring for the company is the immediate financing of its cash flow which is replenished without waiting for the due date of the invoices. Thus, companies that offer a more or less long payment period and do not have a large cash flow can finance themselves easily.
In addition, the company no longer has to manage customer reminders and collections, because this administrative task is entrusted to the factor. Also, it is a short-term financing solution that avoids borrowing from a bank with interest to pay. Finally, the guarantee fund reduces the impact of unpaid bills on the company’s cash flow.