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Only the characters from the novel “Twelve Chairs” can put forward the condition “money in the morning - chairs in the evening”, but suppliers sometimes have to sell their goods and services with a payment delay of several months. We are figuring out how to prevent this situation from hitting your business.
You delivered goods or rendered services, and they will pay for them in a month. It seems that your business is becoming like a banking business: you lend to your customers. But unlike a bank, you have no spare money, no credit analysts, and no debt collection service. And every delay in payment threatens to leave the business without working capital. Factoring will help protect against risks and take your business to a new level.
Factoring is the exchange of future earnings for money. You sold the item on a deferred or deferred payment basis and issued an invoice to the customer. This invoice is a promise of your future earnings, but you haven't received the money from the buyer yet. The bank, microfinance institution (MFI) or factoring company takes this invoice and pays it before your buyer does. This is how an intermediary factor appears in settlements between the seller and the client. He can, in addition to payment, conduct trade documents.
The company "Above the rafters" produces and sells building materials. Supplies to the Plotniki construction hypermarket chain could double the company's turnover, but the chain pays suppliers with a two-month delay.
The contract was signed, the goods were shipped, but until the money comes from "Plotnikov", the company "Vyshe rafter" will have to pay rent for the warehouse and office for two months and pay salaries to employees. There will not be enough working capital for this. This situation is called a cash gap. It can be resolved with the help of factoring.
The factoring company "Money at once" offers manufacturers of building materials to transfer 80% of future proceeds immediately. In return, the factor will receive the right to the payment that the Plotniki network owes to the company "Above the rafters". And when the network pays off the factor, it will transfer 18% of the invoice amount to the manufacturer of building materials - the rest of the proceeds minus the commission for the factoring service.
Why is factoring useful?
Factoring allows you to make a profitable offer to the client
Delay is a benefit for your client: by offering him comfortable payment terms, you can get ahead of your competitors. And with the help of factoring, you can release goods or provide services on a delayed basis, without fear of cash shortages: the proceeds will come on the day of shipment, and this money can be used immediately.
No need to leave a deposit
Unlike a loan in factoring, you do not need to leave a collateral in order to receive money. The collateral is your receivables, that is, future earnings.
With factoring, you can scale your turnover
You can increase supplies during high season or enter new markets. If the demand in the market falls, you yourself can choose for which supplies you need a factoring service, so as not to pay extra commissions.
The factor can check the client and control the refund
Deferred sales are always a risk. A customer who paid accurately last year suddenly started delaying payments this year. Or a large customer just stops answering your calls. Or a new customer asks for a deferral, but you are not sure that he will pay for the item. These situations are known to all businessmen.
There are factoring options that help reduce the risk of default. The factor can independently check the solvency of your customers, set a limit on deliveries on credit to a specific buyer and recommend the duration of a deferred payment. And after the factor provides financing, he himself will remind the buyer of the payment terms. Factoring can free your business from the credit crunch, the risks of non-payment, and cash gaps.
What are the disadvantages of factoring?
1. Factoring works only with deferred payment agreements
You cannot involve a factor in cases where you enter into contracts with the condition of immediate payment. He cannot work as a sudden payment delay insurance.
2. Factoring allows only cashless payments
You won't be able to pay in cash from hand to hand with a factor.
3. For factoring, you need to collect a lot of documents
The factor will need three sets of documents:
4. The factor fixes the terms of payment
If you work through a factor, you will not be able to informally agree with the buyer about new payment terms or the return of goods - the factor will stop financing.
How does factoring work?
Step 1. You enter into an agreement with the buyer, which provides for a fixed payment deferral. The client pays with you only in a non-cash way. When you deliver a product or provide a service, you have accounts receivable on your balance sheet (invoice for future payment). With this receivable and the deferral agreement, you come to the factor.
Step 2. The factor is willing to provide financing in exchange for your receivable. You conclude a factoring agreement with him and agree on how the document flow will go. From this moment on, the receivables no longer belong to you, but to the factor - and the client must pay the invoices issued by you according to the details of the factor. Do not forget to provide these details to your buyer.
Step 3. The factor on your application transfers financing to you - the so-called first payment. The size of the first payment ranges from 70 to 99.5%, most often 80–90% of the delivery amount. The scheme is simple: money versus documents (which confirm acceptance of goods or receipt of services).
Step 4. Your client-buyer transfers to the factor's account the money that he owed you - all 100%.
Step 5. If the factor at the first payment transferred you only a part of the funds and you did not pay the commission to him, then he deducts the amount of the first payment and his commission from the money received from the client and transfers the second payment to you.
How much does factoring cost?
The factor commission usually consists of several parts:
It is easier to calculate the cost of factoring as a percentage of the amount of one delivery. The range of market offers is from 0.5 to 4%. Depending on the type of factoring and the conditions of the factor, the commission is paid at the time the financing is issued or after the factor receives 100% of the payment from the buyer. In the second case, if the buyer does not pay on time, some factors set an increased commission for each day of delay.
Electronic document flow with the factor and the client helps to reduce the cost of factoring.
What is factoring?
Most often, two types of factoring are used: with regression and without regression. The difference is who takes the risk if the client does not pay for the delivery - the factor or you. A new type of factoring is also gaining popularity - reversible. In this case, the buyer becomes a party to the factoring agreement and is directly liable to the factor.
Regression factoring
Regression factoring is usually cheaper than non-recourse factoring and is easier to obtain.
With recourse factoring, the receivable is retained on your balance sheet. The factor does not transfer all the money to you as the first payment, but only a part.
If the buyer does not pay on time, the factor makes a backward concession, that is, it turns your factoring into a loan - it requires you to return the first payment and pay a commission for using the money and working with documents.
Non-recourse factoring
This service is similar to an insurance policy for which you have already received reimbursement.
The factor redeems your receivables to its balance sheet. The first payment factor can pay you the full amount.
If the delivery is not paid, the factor remains one-on-one with your customer-buyer, you are not obliged to return the money to the factor.
Non-recourse factoring eliminates the supplier's financial risk, but generally costs more.
Reverse factoring
In this scheme, the seller, the buyer, and the factor enter into a tripartite agreement. Typically, such factoring is initiated by large retail chains that want to receive or increase the deferred payment.
Suppliers with reverse factoring receive financing immediately after delivery of the goods and, as a rule, in full. Accounts receivable appear on the balance sheet of the factor. And the buyer is obliged to pay the money to him.
Reverse factoring can also be regressive. In this case, the factor may demand money from the supplier if the trading network does not transfer payment to him on time. The supplier and his client can share the costs of reverse factoring in the required proportion and prescribe this in the terms of the contract.
What is worth remembering if you want to conclude a factoring agreement?
Factoring is not last resort financing. Factors do not work with those who “need money yesterday”. The best situation for a factor is when he is contacted one to two months before the start of sales.
The factor takes over the communication with your clients on a sensitive issue - timely payment. If your clients are strongly opposed to such communication, most likely, the factoring agreement will not work.
Carefully read the terms of the factoring agreement and all attachments to it. If, in addition to money, a factor promises to provide you services with complex names, ask what exactly and on what terms it offers you. Ask the factor to calculate the cost of factoring using an example from your practice.
You delivered goods or rendered services, and they will pay for them in a month. It seems that your business is becoming like a banking business: you lend to your customers. But unlike a bank, you have no spare money, no credit analysts, and no debt collection service. And every delay in payment threatens to leave the business without working capital. Factoring will help protect against risks and take your business to a new level.
Factoring is the exchange of future earnings for money. You sold the item on a deferred or deferred payment basis and issued an invoice to the customer. This invoice is a promise of your future earnings, but you haven't received the money from the buyer yet. The bank, microfinance institution (MFI) or factoring company takes this invoice and pays it before your buyer does. This is how an intermediary factor appears in settlements between the seller and the client. He can, in addition to payment, conduct trade documents.
The company "Above the rafters" produces and sells building materials. Supplies to the Plotniki construction hypermarket chain could double the company's turnover, but the chain pays suppliers with a two-month delay.
The contract was signed, the goods were shipped, but until the money comes from "Plotnikov", the company "Vyshe rafter" will have to pay rent for the warehouse and office for two months and pay salaries to employees. There will not be enough working capital for this. This situation is called a cash gap. It can be resolved with the help of factoring.
The factoring company "Money at once" offers manufacturers of building materials to transfer 80% of future proceeds immediately. In return, the factor will receive the right to the payment that the Plotniki network owes to the company "Above the rafters". And when the network pays off the factor, it will transfer 18% of the invoice amount to the manufacturer of building materials - the rest of the proceeds minus the commission for the factoring service.
Why is factoring useful?
Factoring allows you to make a profitable offer to the client
Delay is a benefit for your client: by offering him comfortable payment terms, you can get ahead of your competitors. And with the help of factoring, you can release goods or provide services on a delayed basis, without fear of cash shortages: the proceeds will come on the day of shipment, and this money can be used immediately.
No need to leave a deposit
Unlike a loan in factoring, you do not need to leave a collateral in order to receive money. The collateral is your receivables, that is, future earnings.
With factoring, you can scale your turnover
You can increase supplies during high season or enter new markets. If the demand in the market falls, you yourself can choose for which supplies you need a factoring service, so as not to pay extra commissions.
The factor can check the client and control the refund
Deferred sales are always a risk. A customer who paid accurately last year suddenly started delaying payments this year. Or a large customer just stops answering your calls. Or a new customer asks for a deferral, but you are not sure that he will pay for the item. These situations are known to all businessmen.
There are factoring options that help reduce the risk of default. The factor can independently check the solvency of your customers, set a limit on deliveries on credit to a specific buyer and recommend the duration of a deferred payment. And after the factor provides financing, he himself will remind the buyer of the payment terms. Factoring can free your business from the credit crunch, the risks of non-payment, and cash gaps.
What are the disadvantages of factoring?
1. Factoring works only with deferred payment agreements
You cannot involve a factor in cases where you enter into contracts with the condition of immediate payment. He cannot work as a sudden payment delay insurance.
2. Factoring allows only cashless payments
You won't be able to pay in cash from hand to hand with a factor.
3. For factoring, you need to collect a lot of documents
The factor will need three sets of documents:
- for your business (the list is the same as when receiving a loan);
- for your clients with whom the factor will work (questionnaire and balance sheets for 6-12 months);
- for the deliveries themselves (invoices, waybills, universal transfer documents).
4. The factor fixes the terms of payment
If you work through a factor, you will not be able to informally agree with the buyer about new payment terms or the return of goods - the factor will stop financing.
How does factoring work?
Step 1. You enter into an agreement with the buyer, which provides for a fixed payment deferral. The client pays with you only in a non-cash way. When you deliver a product or provide a service, you have accounts receivable on your balance sheet (invoice for future payment). With this receivable and the deferral agreement, you come to the factor.
Step 2. The factor is willing to provide financing in exchange for your receivable. You conclude a factoring agreement with him and agree on how the document flow will go. From this moment on, the receivables no longer belong to you, but to the factor - and the client must pay the invoices issued by you according to the details of the factor. Do not forget to provide these details to your buyer.
Step 3. The factor on your application transfers financing to you - the so-called first payment. The size of the first payment ranges from 70 to 99.5%, most often 80–90% of the delivery amount. The scheme is simple: money versus documents (which confirm acceptance of goods or receipt of services).
Step 4. Your client-buyer transfers to the factor's account the money that he owed you - all 100%.
Step 5. If the factor at the first payment transferred you only a part of the funds and you did not pay the commission to him, then he deducts the amount of the first payment and his commission from the money received from the client and transfers the second payment to you.
How much does factoring cost?
The factor commission usually consists of several parts:
- for the use of money for the grace period (in percent per annum);
- for assessing the financial condition of the buyer and interaction with him;
- for document flow.
It is easier to calculate the cost of factoring as a percentage of the amount of one delivery. The range of market offers is from 0.5 to 4%. Depending on the type of factoring and the conditions of the factor, the commission is paid at the time the financing is issued or after the factor receives 100% of the payment from the buyer. In the second case, if the buyer does not pay on time, some factors set an increased commission for each day of delay.
Electronic document flow with the factor and the client helps to reduce the cost of factoring.
What is factoring?
Most often, two types of factoring are used: with regression and without regression. The difference is who takes the risk if the client does not pay for the delivery - the factor or you. A new type of factoring is also gaining popularity - reversible. In this case, the buyer becomes a party to the factoring agreement and is directly liable to the factor.
Regression factoring
Regression factoring is usually cheaper than non-recourse factoring and is easier to obtain.
With recourse factoring, the receivable is retained on your balance sheet. The factor does not transfer all the money to you as the first payment, but only a part.
If the buyer does not pay on time, the factor makes a backward concession, that is, it turns your factoring into a loan - it requires you to return the first payment and pay a commission for using the money and working with documents.
Non-recourse factoring
This service is similar to an insurance policy for which you have already received reimbursement.
The factor redeems your receivables to its balance sheet. The first payment factor can pay you the full amount.
If the delivery is not paid, the factor remains one-on-one with your customer-buyer, you are not obliged to return the money to the factor.
Non-recourse factoring eliminates the supplier's financial risk, but generally costs more.
Reverse factoring
In this scheme, the seller, the buyer, and the factor enter into a tripartite agreement. Typically, such factoring is initiated by large retail chains that want to receive or increase the deferred payment.
Suppliers with reverse factoring receive financing immediately after delivery of the goods and, as a rule, in full. Accounts receivable appear on the balance sheet of the factor. And the buyer is obliged to pay the money to him.
Reverse factoring can also be regressive. In this case, the factor may demand money from the supplier if the trading network does not transfer payment to him on time. The supplier and his client can share the costs of reverse factoring in the required proportion and prescribe this in the terms of the contract.
What is worth remembering if you want to conclude a factoring agreement?
Factoring is not last resort financing. Factors do not work with those who “need money yesterday”. The best situation for a factor is when he is contacted one to two months before the start of sales.
The factor takes over the communication with your clients on a sensitive issue - timely payment. If your clients are strongly opposed to such communication, most likely, the factoring agreement will not work.
Carefully read the terms of the factoring agreement and all attachments to it. If, in addition to money, a factor promises to provide you services with complex names, ask what exactly and on what terms it offers you. Ask the factor to calculate the cost of factoring using an example from your practice.
