Factoring

Factoring is a form of financing in which we sell our receivable against a customer to a third party. The customer is usually a factoring company. Selling the receivable also means that we won't get the full amount, but we can get the money sooner.

In the life of every business, there may be a situation when the product sold has not yet been paid, but the subcontractors and suppliers must be paid. In such a case, if we have a claim that has not yet expired, but the buyer will pay with great certainty, then the receivable can be sold. This is factoring. 

It often happens that a large customer stipulates a long payment terms in the contract. In particular, wholesalers like to negotiate a very long deadline for themselves from the eyes of businesses. It happens that you have to wait up to 180 days before the revenue flows in. However, smaller companies cannot dictate such conditions to their suppliers and subcontractors. This worsens the cash flow. They may not be able to pay these companies on time. 

In such a case, it is not a question of a customer not paying unexpectedly. The buyer will very likely pay, but later than would be ideal for our company. This situation can therefore be anticipated. If we are forced to conclude a contract with someone with long payment terms, we must also calculate the company's liabilities in advance. This is what the financial plan is for. Payment difficulties resulting from long payment terms can be bridged with a credit, but factoring is also a good solution. 

The essence of factoring is that the factoring company buys from us the partner's debt, which has already been verified with a performance certificate, before the due date. In this way, we get money sooner and can fulfill our due obligations. 

Of course, the factoring company makes us pay for the risks, since it buys the debt not at the same value as the receivable, but at a cheaper price. The size of the price depends on the partner's ability to solvency. The bigger, better capitalised and more reliable the partner, the bigger the share of the receivable in advance. 

In order to avoid non-payment, it never hurts to check our partners in public company databases before signing the contract. This is especially true when they want to agree with us on long payment terms. If we find negative information about the partner company in these databases (for example, enforcement proceedings or previous liquidation process), then the factor companies will not want to buy the receivable against them from us either. Factor companies will consider the buyer too risky. Therefore, contracting with such partners is inherently risky.

There are several types of factoring companies. It can be a bank-affiliated or bank-independent company. The activity is subject to a license in most countries. It is advisable to check the existence of the permit.