Only the characters of 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 deferred payment of several months. We are figuring out how to make sure that this situation does not hit your business.
You have delivered goods or rendered services, and they will be paid in a month. It seems that your business is becoming like a banking one: you credit your customers. But unlike a bank, you don't have free money, credit analysts and debt collection services. And each delay in payment threatens to leave the business without working capital. Factoring will help protect against risks and bring business to a new level.
Factoring is the exchange of future revenue for money. You sold the product with a deferred or installment payment condition and billed the customer. This account is a promise of your future revenue, but you have not received money from the buyer yet. A bank, microfinance organization (MFO) or factoring company takes this bill and pays it before your buyer does. Thus, an intermediary factor appears in the calculations between the seller and the client. He can, in addition to payment, conduct a trade document flow.
How is factoring useful?
Factoring allows you to make a favorable offer to the client. The 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 with a delay, without fear of cash gaps: revenue will come on the day of shipment, and this money can immediately be put into business.
No need to leave a deposit
Unlike a loan in factoring, you do not need to leave a deposit to get money. The collateral becomes your accounts receivable, that is, future revenue.
With factoring, you can scale the turnover
You can increase supplies during the high season or enter new markets. If the demand in the market is falling, you can choose for which supplies you need a factoring service so as not to pay extra commissions.
The factor can check the customer and control the refund
Deferred payment sales are always a risk. A client who paid carefully last year suddenly started delaying payments this year. Or a large buyer simply stops answering your calls. Or a new customer asks for a delay, but you are not sure that he will pay for the goods. These situations are known to all businessmen.
There are factoring options that help reduce the risks of non-payment. The factor can check the solvency of your customers by itself, set a limit on deliveries on credit to a specific buyer and recommend the duration of deferred payment. And after the factor provides financing, he himself will remind the buyer about the payment terms. Factoring can free your business from the credit routine, risks of non-payments and cash gaps.
What are the disadvantages of factoring?
1. Factoring works only with deferred payment agreements
It is impossible to attract a factor in cases when you conclude contracts with the condition of immediate payment. He cannot work as insurance in case of a sudden delay in payment.
2. Factoring allows only non-cash payment
, you will not 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 payment terms
If you work through a factor, you will not be able to informally agree with the buyer on new payment terms or return of the goods — the factor will stop financing.
How does factoring work?
Step 1. You and the buyer conclude an agreement that provides for a fixed deferred payment. The client pays you only in a non-cash way. When you deliver a product or provide a service, you have accounts receivable on your balance sheet (an invoice for future payment). With this receivable and a deferral agreement, you come to the factor.
Step 2. The Factor is ready to provide financing in exchange for your debtor. You enter into a factoring agreement with him and agree on how the document flow will take place. From this moment on, the accounts receivable 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 inform these details to your buyer.
Step 3. The factor on your application transfers financing to you — the so-called first payment. The amount of the first payment ranges from 70 to 99.5%, most often — 80-90% of the delivery amount. The scheme is simple: money against documents (which confirm the acceptance of goods or receipt of services).
Step 4. Your customer-buyer transfers to the factor's account the money that he owed you — all 100%.
Step 5. If the factor transferred only part of the funds to you during the first payment 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 commission of a factor usually consists of several parts:
What is factoring like?
Two types of factoring are most often used: with regression and without regression. The difference is who assumes the risks if the customer 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 participant in the factoring agreement and is responsible directly to the factor.
Factoring with regression
Factoring with regression is usually cheaper than without it, and it is easier to get it.
When factoring with regression, accounts receivable are saved on your balance sheet. With the first payment, the factor does not transfer all the money to you, but only part of it.
If the buyer does not pay on time, the factor makes a reverse assignment, that is, it turns your factoring into a loan — it requires you to return the first payment and pay a commission for using money and working with documents.
Factoring without regression
This service is similar to an insurance policy for which you have already received a refund.
The factor redeems your accounts receivable on its balance sheet. The factor can pay you the entire amount with the first payment.
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.
Factoring without recourse reduces the financial risks of the supplier to zero, but, as a rule, it costs more.
Reverse factoring
In this scheme, the seller, the buyer and the factor conclude a three-way contract. Usually, the initiator of such factoring is large retail chains that want to receive or increase the deferred payment.
Suppliers with reverse factoring receive financing immediately after the delivery of the goods and, as a rule, in full. Accounts receivable are listed on the factor's balance sheet. And the buyer is obliged to pay the money to him.
Reverse factoring can also be with regression. In this case, the factor may demand money from the supplier if the trading network does not transfer the payment to him in time. The supplier and his client can share the costs of reverse factoring in the right proportion and prescribe this in the terms of the contract.
What should you keep in mind if you want to sign a factoring contract?
Factoring is not "last resort financing". Factors do not work with those who "need money yesterday". The best situation for a factor is when it is approached one or two months before the start of sales.
The factor takes care of communicating with your customers on a sensitive issue — timely payment. If your clients are strongly against such communication, most likely, you will not be able to conclude a factoring contract.
Carefully read the terms of the factoring agreement and all appendices to it. If, in addition to money, the factor promises to provide you with 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 have delivered goods or rendered services, and they will be paid in a month. It seems that your business is becoming like a banking one: you credit your customers. But unlike a bank, you don't have free money, credit analysts and debt collection services. And each delay in payment threatens to leave the business without working capital. Factoring will help protect against risks and bring business to a new level.
Factoring is the exchange of future revenue for money. You sold the product with a deferred or installment payment condition and billed the customer. This account is a promise of your future revenue, but you have not received money from the buyer yet. A bank, microfinance organization (MFO) or factoring company takes this bill and pays it before your buyer does. Thus, an intermediary factor appears in the calculations between the seller and the client. He can, in addition to payment, conduct a trade document flow.
Factoring allows you to make a favorable offer to the client. The 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 with a delay, without fear of cash gaps: revenue will come on the day of shipment, and this money can immediately be put into business.
No need to leave a deposit
Unlike a loan in factoring, you do not need to leave a deposit to get money. The collateral becomes your accounts receivable, that is, future revenue.
With factoring, you can scale the turnover
You can increase supplies during the high season or enter new markets. If the demand in the market is falling, you can choose for which supplies you need a factoring service so as not to pay extra commissions.
The factor can check the customer and control the refund
Deferred payment sales are always a risk. A client who paid carefully last year suddenly started delaying payments this year. Or a large buyer simply stops answering your calls. Or a new customer asks for a delay, but you are not sure that he will pay for the goods. These situations are known to all businessmen.
There are factoring options that help reduce the risks of non-payment. The factor can check the solvency of your customers by itself, set a limit on deliveries on credit to a specific buyer and recommend the duration of deferred payment. And after the factor provides financing, he himself will remind the buyer about the payment terms. Factoring can free your business from the credit routine, risks of non-payments and cash gaps.
What are the disadvantages of factoring?
1. Factoring works only with deferred payment agreements
It is impossible to attract a factor in cases when you conclude contracts with the condition of immediate payment. He cannot work as insurance in case of a sudden delay in payment.
2. Factoring allows only non-cash payment
, you will not 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);
- according to your clients with whom the factor will work (questionnaire and turnover balance sheets for 6-12 months);
- for the deliveries themselves (invoices, waybills, universal transfer documents).
4. The factor fixes the payment terms
If you work through a factor, you will not be able to informally agree with the buyer on new payment terms or return of the goods — the factor will stop financing.
How does factoring work?
Step 1. You and the buyer conclude an agreement that provides for a fixed deferred payment. The client pays you only in a non-cash way. When you deliver a product or provide a service, you have accounts receivable on your balance sheet (an invoice for future payment). With this receivable and a deferral agreement, you come to the factor.
Step 2. The Factor is ready to provide financing in exchange for your debtor. You enter into a factoring agreement with him and agree on how the document flow will take place. From this moment on, the accounts receivable 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 inform these details to your buyer.
Step 3. The factor on your application transfers financing to you — the so-called first payment. The amount of the first payment ranges from 70 to 99.5%, most often — 80-90% of the delivery amount. The scheme is simple: money against documents (which confirm the acceptance of goods or receipt of services).
Step 4. Your customer-buyer transfers to the factor's account the money that he owed you — all 100%.
Step 5. If the factor transferred only part of the funds to you during the first payment 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 commission of a factor usually consists of several parts:
- for the use of money for the period of deferral (as a percentage per annum);
- for assessing the financial condition of the buyer and interacting with him;
- for the document flow.
What is factoring like?
Two types of factoring are most often used: with regression and without regression. The difference is who assumes the risks if the customer 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 participant in the factoring agreement and is responsible directly to the factor.
Factoring with regression
Factoring with regression is usually cheaper than without it, and it is easier to get it.
When factoring with regression, accounts receivable are saved on your balance sheet. With the first payment, the factor does not transfer all the money to you, but only part of it.
If the buyer does not pay on time, the factor makes a reverse assignment, that is, it turns your factoring into a loan — it requires you to return the first payment and pay a commission for using money and working with documents.
Factoring without regression
This service is similar to an insurance policy for which you have already received a refund.
The factor redeems your accounts receivable on its balance sheet. The factor can pay you the entire amount with the first payment.
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.
Factoring without recourse reduces the financial risks of the supplier to zero, but, as a rule, it costs more.
Reverse factoring
In this scheme, the seller, the buyer and the factor conclude a three-way contract. Usually, the initiator of such factoring is large retail chains that want to receive or increase the deferred payment.
Suppliers with reverse factoring receive financing immediately after the delivery of the goods and, as a rule, in full. Accounts receivable are listed on the factor's balance sheet. And the buyer is obliged to pay the money to him.
Reverse factoring can also be with regression. In this case, the factor may demand money from the supplier if the trading network does not transfer the payment to him in time. The supplier and his client can share the costs of reverse factoring in the right proportion and prescribe this in the terms of the contract.
What should you keep in mind if you want to sign a factoring contract?
Factoring is not "last resort financing". Factors do not work with those who "need money yesterday". The best situation for a factor is when it is approached one or two months before the start of sales.
The factor takes care of communicating with your customers on a sensitive issue — timely payment. If your clients are strongly against such communication, most likely, you will not be able to conclude a factoring contract.
Carefully read the terms of the factoring agreement and all appendices to it. If, in addition to money, the factor promises to provide you with 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.