What are factoring companies and how do they work? What is factoring and an example of calculating Debt factoring

You are a small company and you won a tender for the supply of goods to a large corporation. There is one "but" - the contract is drawn up in such a way that you will be paid in three months at best. How to maintain working capital, pay salaries, pay for your own purchases all this time? You can try to take out a loan, but it is often easier and more profitable to resort to factoring to cover the cash gap. What is factoring, who provides this service, what is its scheme and what pitfalls there may be - we will talk in this article.

The most reliable way of delivering goods or services is to work on a prepaid basis. But this is not always the case, especially if the company operates in the "buyer's market" - in an area where the buyer dictates the terms of delivery. Considering the high density of the corporate and public sectors in the economy, almost all small or medium-sized businesses that want to receive serious income have to deal with such a scheme. Corporations, too, most often interact with each other on a deferred payment basis.

Factoring (from the English factor - intermediary, sales agent) is a way to restore the supplier's working capital by attracting third-party funds. The banks give the money to the supplier, in exchange for receiving the right to claim the debt from the buyer, plus a certain fee for the provision of factoring services. In fact, this is a type of trade lending with its own characteristics, which will be discussed below. The maximum grace period in most cases is 180 days.

Video: What is factoring

The history of the emergence of factoring dates back to antiquity, and in its modern form it was implemented in the 17th-18th centuries with the development of world trade, when the need arose for the time interval between the shipment of goods and payment.

In post-Soviet Russia, factoring developed in the early 2000s, when companies recovering from the crisis needed insurance in the form of third-party funds raised as circulating funds in large transactions. However, so far only less than 1% of transactions in the commercial sector (excluding the banking sector) are made using factoring. In the West, this figure in some segments reaches 15%. The reason for this difference is the high volatility of the Russian market in most product segments, as well as the cautious policy of banks, which it is easier to give a loan on collateral than to check the solvency of a buyer of a particular product.

In the legislation, the factoring transaction is called "Financing against the assignment of a monetary claim" and is regulated by Article 824 of the Civil Code of the Russian Federation.

Terminology

In the process of studying the article, you will come across the following terms:

Factor or financial agent, intermediary- an organization operating in cash. The conclusion of contracts for the assignment of rights to monetary claims is exempt from licensing. The law introduces a restriction only on the status of enterprises - it must be a legal entity conducting commercial activities (Article 825 of the Civil Code of the Russian Federation). Therefore, both a credit institution (banks, microfinance organizations) and any enterprise, regardless of the organizational form, composition of founders, can act as an intermediary. In Russia, the majority of factoring operations are carried out by banks or specialized subsidiaries and branches created by them.
Client, lender- the seller who released the goods (completed the work, services) with a deferred payment and transfers the right to claim the debt for them to the factor.
Buyer, debtor, debtor- a company to which products (goods) were shipped or performed works (services) with the condition of payment for them after a certain period of time.
Provider- the counterparty of the lender supplying him materials (goods) or performing work.
Factoring company Is a company that provides a factoring service.
Factoring agreement- a legally drawn up document that regulates the relationship between the parties to a factoring transaction, describes the rights and obligations, liability in case of violation of obligations.
Factoring operations- these are actions aimed at the implementation of the factoring service itself. The operations are: the analysis process the financial condition of the buyer, his solvency, transfer of invoices, transfer of funds to the parties involved in the transaction, etc.
Factoring service Is a set of measures to ensure a factoring transaction on the part of a factor (bank or factoring company), which primarily includes ensuring the seller's (client's) financial expenses in the amount of 70% to 90% of the transaction amount, which allows the seller to conduct transactions with other companies on the terms of granting a deferred payment without cash gaps.
Factoring companies- these are legal entities that provide factoring services, have the necessary resources to carry out transactions and charge a commission from the seller (client) for this.

When factoring is needed

Entrepreneurs often try to resort to factoring, as well as to a regular loan, in force majeure circumstances. However, it is then that it is most difficult to come to an agreement with the bank. Under normal conditions, factoring is most popular in the following cases:

The supplier is a small or medium-sized enterprise, the buyer is a large company with a strict scheme of deferred payment for the delivered goods.
The need for a small or medium-sized enterprise to replenish working capital. Loans to such companies are not given on the most favorable terms, therefore factoring is often a more logical option: the bank's attention is drawn to a greater extent not to the seller, but to the buyer.
The need to provide the buyer with a deferred payment and thereby increase his loyalty.

In Russian conditions, factoring services are especially popular when the company plans to develop by cooperating with large companies on their terms. In this case, the provision of working capital allows you to make the most of the high from transactions. Simply put, after receiving payment for the supply, money is invested in development, and not in repaying debts accumulated during the waiting time for payment.

Factoring is also relevant for companies working with chain stores. By handing over the goods to the retail network, the supplier does not wait until it is sold, but immediately disposes of the profit, directing it to the purchase of a new product, the development of production or other methods of stimulating business.

Who is involved in factoring

Factoring is a three-way deal. The following parties are involved in it:

1 Supplier (client, seller) - a legal entity that supplies goods or provides services on a deferred payment basis.

2 Buyer (debtor) - a legal entity that purchases a product or service on a deferred payment basis.

3 Factor is the key person in the transaction. Most often, this is a bank or a specialized company that provides the supplier with funds in the amount of up to 90% of the value of the goods supplied or services rendered and receives a commission for this. After the conclusion of the contract, the right to collect the receivables from the buyer passes to the factor.

Factoring deals can be categorized on several grounds.

By sharing risks:

Regression factoring(recourse factoring) is when the bank (factoring company) does not assume the risks of non-fulfillment of the contract by the buyer. If the latter did not eventually pay the factor for the goods received, the documents on the transaction are returned to the seller, who will fully compensate the bank for the spent and then he himself collects the debt for the transferred goods from the buyer. This type of factoring is rare, since it is unprofitable for the seller and is used only in very desperate situations.
Non-recourse factoring- the bank assumes all the risks of the transaction. Having paid the supplier under the factoring agreement, the bank itself collects the debt from the buyer in case of delay, pays legal costs, and bears other expenses.

By the degree of informing the buyer:

Open factoring- this is when the seller informs the buyer that the right to demand payment for the purchase and sale transaction has been transferred to the factor, and the buyer must make the payment to the factoring company.
Closed factoring- the buyer is not informed about the participation of a third party in the transaction. He pays the supplier, and he transfers the money to the factor.

For tax accountability of the parties to the transaction:

Internal factoring- the seller, the buyer and the factor are tax residents of the same country.
External (international) factoring- one of the parties to the transaction is a tax resident of another state.

At the moment the buyer's obligation arises:

Real factoring- the contract between the seller and the factor is concluded after the delivery of the goods to the buyer.
Consensual factoring- the contract between the seller and the factor is concluded before the delivery of the goods, after the conclusion of the contract between the seller and the buyer.

By the number of factors involved in the transaction:

Direct factoring- one factor is involved in the transaction. This is the most common pattern.
Mutual factoring- two factors are involved in the transaction, and one acts on behalf of the second. This happens when the transaction is international - either the seller or the buyer are residents of another state. A foreign factoring company engages a local one to act on its own behalf.

For a set of services of a factoring company:

Narrow factoring- the factor provides only basic services for one transaction: checking the buyer's solvency, providing funds, consulting.
Broad (conventional) factoring- the factor provides full support of the client's receivables, including the preparation of all documents, accounting services, insurance, extended consulting.

By type of document flow of the transaction:

Traditional factoring- a transaction using paper documents.
Electronic factoring (EDI factoring)- the transaction is executed using exclusively electronic document management.

How a deal takes place using factoring

The factoring transaction scheme depends on many factors. The most common looks like this:

1 An agreement is concluded between the supplier and the buyer for the supply of goods on a deferred payment basis.

2 The seller and the buyer agree on the involvement of a third party (factoring company or bank) in the transaction.

3 An agreement is concluded between the seller and the factoring company, the transfer of invoices (if the goods have already been delivered) or issued invoices, as well as a copy of the agreement between the seller and the buyer. At this stage, the factor checks the buyer's financial condition, his solvency, financial discipline (execution of such contracts), as well as the state of debt - delay is unacceptable. The following points must be prescribed in the agreement:

subject of the contract;
rights and obligations of the parties;
transaction financing procedure;
amount limit;
mechanism for transferring rights to receivables to a factor;
factor services cost, payment procedure;
the period of the contract;
other conditions (for example, insurance against the risks of non-payment).

4 The factor pays up to 90% of the cost of the goods (on invoices), if the goods are shipped, in rare cases - up to 100%. At this stage, a commission is charged.

5 Buyer pays for the product received. The money is transferred by the buyer to the factor account. In the case of closed factoring, the money is transferred by the buyer to the seller, and then by the seller to the factor.

How a factoring transaction is controlled

The bank or factoring company constantly monitors the debtor's activities during the transaction. Both the actual fulfillment of the terms of the transaction and the buyer's compliance with the factor's requirements are analyzed. If the fact of withdrawal of assets is noted or signs appear, the factoring agreement may be terminated, and the factor will require immediate payment of receivables.

The same applies to the breach of obligations by the parties to the transaction: the factor can bring claims both to the seller, with whom the bank has a direct agreement on the provision of factoring services, and to the buyer, who, as a result of the transaction, became the debtor of the factor.

Also, the reassessment of the client and his partner-buyers is carried out on an ongoing basis.

Pros and cons of factoring

Advantages	disadvantages
Funds are provided without collateral	Relatively high cost (especially with narrow factoring)
Loyal requirements for the client's solvency	The need to disclose information about customers and their own transactions
Factoring agreement - insurance against non-payment, as well as against currency risks (if the transaction is international)	Factoring is used only in non-cash transactions
The factor collects the client's debt	-
Painless income tax payment. With the usual deferred payment, it may turn out that the tax will have to be paid before the money for the goods arrives.	-
Factoring is not a loan, it is not reflected in the seller's balance sheet.	-
Additional attractiveness of the company for clients due to deferred payment.	-

You can just call the first bank you come across or the first ad you see, but it is better to choose a factoring company based on the specific goals of your business. The selection algorithm can be as follows:

1 Determine for what purposes factoring is needed: for a one-time transaction or for servicing all receivables. In the first case, you can choose a narrow factoring, in the second, you need a factor that provides a wide range of services and is ready to work with difficult situations. Yes, it will come out more expensive, but you will not have problems with working capital.

2 Choose between a bank and a factoring company. The first option is more convenient if you have significant turnovers (for example, Sberbank Factoring works on transactions from 10 million rubles), and also if you plan to transfer the management of all receivables to a factor for a number of transactions. But be prepared for the fact that the bank will check you and your counterparties carefully and meticulously. Specialized factoring companies are a more convenient option for small businesses: they often provide money faster, albeit in a significantly smaller amount than banks. Tariffs in each case are set individually, so there is no point in comparing them between banks and factoring companies.

3 Collect feedback on the factor. To isolate clearly ordered ones in order to compose an objective picture.

4 Analyze the cost of services factor, compare with the cost of the loan (if you have the opportunity to attract loan funds).

5 Find out the possibility of online interaction with a factoring company - this significantly reduces the time required for payments to go through, and also eliminates the need to go to the bank.

TOP-5 banks providing factoring services

In 2017, the turnover of factoring transactions in Russia reached 2.35 trillion rubles. Most of this amount is made up of funds of state banks, provided to cover the cash gaps of the lending institutions rehabilitated by the Central Bank of the Russian Federation. If we talk about the TOP-5 banks that provide factoring services to “ordinary” businesses, the list will look like this *:

But the TOP-10 banks in terms of factoring financing in 2017 *

VTB-Factoring
Sberbank Factoring
Alfa Bank
GPB factoring
Setelem Bank
GC "National Factoring Company"
Rosbank Factoring
Bank SOYUZ
Raiffeisenbank
Promsvyazbank Group

* according to the data of the Association of Factoring Companies for 2017

Factoring occupies a special place among the huge number of loan products for small and medium-sized businesses. This service allows sellers of goods to protect themselves from non-payments, and buyers - to guarantee themselves uninterrupted supplies, even with a lack of funds in their accounts. Factoring service has both pros and cons, we will consider them in more detail below.

Factoring - what is it in simple words

Factoring services include a whole range of services for financing and evaluating the parties to transactions, as well as its own supply and payment control system.

The essence of factoring financing

For those companies that make wholesale purchases in small batches on a regular basis from one seller, lending with conventional loans is inconvenient and unprofitable. The overdraft system allows you to receive small amounts of loans, but significantly increases the company's expenses due to high interest rates.

Therefore, the supplying companies are interested in attracting a bank or factoring company (factor) as a paying party under supply contracts. In this case, the buyer becomes the debtor of the factor in the amount of delivery and returns the funds to him.

At the same time, the seller receives several advantages at once:

elimination of cash gaps;
the possibility of uninterrupted implementation of production and sales cycles;
additional guarantees for making payments;
obtaining information about the debtor's solvency.

Factoring can be carried out in two forms: with or without regression.

Regression means the ability for a bank or factoring company to return claims for payment of factoring payments to the seller. In other words, if the buyer did not pay for the delivery on time, the seller returns the debt to the factor. Mutual settlements between the seller and the buyer after the closure of the debt on factoring financing, the bank no longer controls.

Separately, it is worth highlighting factoring without notice... In this case, the debtor himself is not notified that deliveries and settlements now occur through factors. Funds can be transferred to the seller's current account with the factor bank.

Most often, the seller applies for the conclusion of a factoring agreement. With the help of the factor, companies expect to compensate for losses from delays in payments to the buyer, while developing cooperation with him on a deferred payment basis. But sometimes a buyer applies for factoring services. In this case, the procedure for purchasing bulk consignments of goods is financed, and the type of factoring itself is called reverse or purchasing.

Video - what is factoring:

Bank factoring system

Factoring financing is carried out if there is an agreement between the seller and the debtor, enshrined in the supply agreement, on a deferred payment for up to 180 (sometimes up to 240 days) from the date of delivery.

In this case, the bank pays the seller funds in the amount of up to 90% of the value of all goods on the consignment note, and the debtor, in turn, transfers the entire amount of the debt to a factoring account in the bank.

The bank, having received the transfer, charges a service fee, for processing data on invoices, interest on the amount of financing for the actual number of days of using credit funds. After that, the main financing debt is extinguished from the amount received, and the remaining funds (if any) are transferred to the seller.

The Bank finances factoring transactions in several stages:

assessment of the solvency of buyers and sellers according to internal bank regulatory documents;
signing an agreement on factoring services, as well as related documentation (bank account agreements, sureties, etc.);
sending to buyers (debtors) notifications about the need to transfer funds to a specialized account opened with a bank in the name of the seller;
acceptance from the seller of consignment notes and invoices for shipped consignments of goods, assessment of the supply agreement and compliance with its terms of the invoice, entering deliveries into the database;
transfer of the financing amount to the seller's account, intra-bank accounting of the volume of claims and payments;
tracking overdue deliveries (that is, those for which the deferred payment has already ended, but payment has not been received from the debtor), sometimes in this case the client can confirm in writing the closure of this delivery, and there will be no recourse claim;
Acceptance of incoming payments from the debtor, their allocation to deliveries, accounting for paid interest and return of overpaid funds to the client.

Factoring company

It is not so important who finances - a bank or a factoring company. The main difference between a bank and a factoring company is its work standards.

If a bank can simultaneously provide various services for maintaining accounts, make transfers between the accounts of a client and a debtor, then a factoring company can provide a wide range of services for insurance of payments, their support, tracking deliveries (including abroad), etc.

The factoring company, in parallel with financing, carries out full support of accounts receivable, participates in resolving disputes with debtors.

Small business use

The SME segment is one of the most sensitive to the lack of funds due to low capitalization and lack of equity capital. That is why factoring is especially in demand in small businesses, as an alternative to bank lending and an additional guarantee of the reliability of transactions.

The main advantages of factoring for this business segment:

availability of credit funds;
absence or minimum amount of additional payments and commissions;
the ability to accelerate the turnover of funds, thereby receiving additional profit;
minimizing risks from establishing relationships with new customers;
the ability to flexibly change the policy of actions in the market, attract customers on favorable and convenient terms of deferred payment.

Advantages and disadvantages

Even in times of crisis, banks are constantly developing a list of credit products for business, allowing entrepreneurs to use borrowed funds for development with minimal costs.

Many of these offerings are too expensive or out of reach for small businesses.

Factoring helps to use credit funds with maximum benefit and minimum overpayment.

However, this product also has its own limitations:

rather high price - about 15-20% per annum;
the need to provide information about debtors;
limited financial flow by sales;
in factoring, only deliveries are used that are settled in a non-cash form.

Positive sides factoring is much more:

lack of collateral;
the ability to transfer control over accounts receivable to a third party; banks and factoring companies take into account all supplies on their accounts, even those for which funding is not provided;
major factors create a special user interface for their program, allowing the client to independently track any changes in accounts receivable;
factoring financing is not considered credit funds and does not affect the key indicators of the company's balance sheet;
banks do not impose strict conditions on the supplier's solvency;
when concluding a factoring agreement without recourse, the factor bears the risks of non-payment from the debtor, while the business is guaranteed timely receipts to the account;
reducing cash gaps allows you to plan financial flows more efficiently.

Factoring, calculation example

Let's take a look at the simplest example:

The seller delivered the goods to the buyer on January 1 for a total of 100,000 rubles. The bank finances 90% of the delivery amount. Rate - 15% per annum, additional payments - commission for processing an invoice in the amount of 50 rubles per item. Deferred payment - 180 days. The debtor paid off on January 21st.

After processing the invoice, the company will receive from the bank: 100,000 * 0.9 = 90,000 rubles.

The commission for using factoring funds will be:

(100,000 * 0.9 * 0.15) / 365 * 20 = 739.73 rubles

Total overpayment for delivery: 739.73 + 50 = 789.73 rubles.

After the debtor transfers the debt to the bank, the factor will return to the seller's account:

100,000 - 90,000 - 739.73 - 50 = 9260.27 rubles.

Factoring rates are quite high. However, the opportunity to use funds from the client today, without waiting for payment at the end of the grace period, is more than compensated for by a small overpayment for a short period of using the factor's funds.

Video - what is factoring in simple terms:

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Factoring is financing against the assignment of a monetary claim, or the resale of amounts receivable to a bank. Factoring arises only from contracts that provide for post-payment - that is, with a deferred payment. It turns out that the products have already been shipped, the revenue is shown in accounting (perhaps taxes have already been paid from it), but the money has not yet been received from the buyer. This situation causes a gap in liquidity, reduces the financial stability of the organization, disrupts the production cycle of the organization, and this does not take into account the case of a delay in payment. Factoring allows you to avoid the problems associated with such payments. The factor (in whose person it is most often a bank or a specialized factoring company) buys the buyer's receivables from the supplier. Factoring can be of different types depending on the role and disclosure of information by the parties.

The advantage of this scheme is obvious - the seller receives money immediately, which he can dispose of at his own discretion. The bank (factoring company) has its own margin from this operation - a certain percentage of the amount of redeemed obligations plus commissions. And then the buyer makes the final settlement with the bank (factoring company).

So, the factoring scheme is as follows:

Participants - seller, buyer, factor

The seller sells the buyer's debt to a factor. At the same time, the seller does not experience failures associated with a lack of financial resources. The factor receives a commission for providing services to the seller. The buyer gets the option to defer payment. This is the simplest factoring scheme:

Please note that not every receivable can be factorized. DZ is subjected to a thorough check at the preliminary stage, where the reality of its recovery from the debtor, and, consequently, his financial condition, is assessed. Also, the package of documents on factoring will be checked by the bank's specialists and it must meet stringent requirements - both legislation and the requirements of the bank.

Factoring with financing and factoring without financing

Factoring with financing implies the payment by the bank of the supplier's receivables in the amount of about 85% minus the discount (margin to the bank), including early payment. The remaining 15% of the transaction amount is reserved in case of receiving claims for quality, quantity, product parameters. Bank margin can be expressed as a percentage of the transaction, commission.

Factoring without funding provides for the transfer of the right to receive proceeds to the factor. That is, the bank does not pay the invoices instead of the buyer (as in the first case), but on the basis of the invoices received from the seller for payment, it requests payment from the buyer on the terms and conditions specified in the product supply agreements. The factor company plays an intermediary role.

Open and closed factoring

Open factoring provides for notification of all parties about their participation in the payment process of the factoring company (bank). The buyer is notified of the bank's participation in the settlement process.

With closed factoring, the buyer is not notified of the participation in the calculations of a third party - a factor. The buyer makes settlements in accordance with the agreement with the seller of the products, and the latter independently calculates with the factor to pay off the payment.

Recourse factoring and non-recourse factoring

Recourse factoring provides that in the event of non-payment by the buyer, the amount of funds will be debited from the buyer. The rate for such factoring will be more profitable, since the risk of the factoring company is significantly reduced. The factoring company (bank) will pay most of the buyer's receivables as soon as possible (for example, 95% of the debt upon entering into a factoring agreement, the rest upon the performance of its obligations by the debtor). Transactions of this nature - recourse factoring account for about 88% of the share in the volume of factoring transactions.

Factoring without recourse provides for the full taking on of the risk by the factoring company that the buyer does not pay the amount of the receivable, which greatly affects the rate for the use of funds and makes this type of factoring the least common in practice.

Internal factoring is carried out on condition that all parties involved are in the same country.

With external factoring, the parties are located in different countries, and the factoring agreement is most often concluded for a part of the debt that is available in a particular country within one or several buyers. This is also called the conclusion of a global assignment agreement.

Possible reasons for denial of factoring services by the bank:

The organization has many debtors, the share of each of which is insignificant
The organization conducts business according to the "buy-sell" scheme - the so-called "crossover"
A product under a factoring agreement raises doubts about its quick implementation and liquidity
The organization acts as a subcontractor
The organization carries out retail trade in small quantities of goods
The organization uses, among other things, non-monetary forms of calculation

So, let's summarize the above. Factoring can be attributed to an active banking operation, implying the assignment of rights to monetary claims. Each of the parties involved can derive a certain benefit from this operation - the timeliness of settlements for the supplier, the delay for the buyer, the commission for the factor. A factor can be both a bank (most often in practice) and a specialized factoring company. Not every debt qualifies for factoring, and not everyone will be able to receive financing against the assignment of a monetary claim.

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In order to run a business without interruption, an enterprise often has to raise funds through unsecured lending. Today it is most profitable to do it under the terms of factoring. However, before resorting to this type of loans, it is very important to understand: factoring, what is it.

Factoring is, in simple words, a kind of unsecured for organizations that provide their customers with goods or services subject to deferred payments. Such financing is usually provided to companies. The use of the factoring mechanism allows many companies to maintain their uninterrupted economic activity, compensating for the costs of supplying raw materials, finished products, as well as carrying out certain works without prepayment. Also, it is this mechanism that allows many firms to simplify their accounting and expand activities as needed without attracting long-term loans.

Factoring: what is it in simple words through understanding the role of the participants in the process

There are only three parties involved in a factoring transaction. Schematically, their functions in the factoring agreement can be presented in the form of the following table:

These roles will be distributed among the factoring participants, regardless of the particular scheme of the transaction.

Types of factoring

Distinguish between closed factoring, in which an organization provides customers with goods or services with a deferred payment, taking a short-term loan from the bank on the basis of receivables that have appeared (this type is the most common) and open factoring, in which the debt is completely transferred to the bank, respectively, to the buyer of the goods or services have to pay directly with this organization. This type of factoring is less popular.

Also in international practice, there are:

(in which all the risks of non-payment fall on the shoulders of the bank);
when exactly the lender is responsible for the timely return of money to the financial institution.

The conditions of factoring are significantly influenced by the risks of the participants. If the transaction is executed with recourse, then the supplier may lose part of the financing if the debtor does not pay for the product or service on time. In this case, the factor has the right to transfer unpaid invoices to the supplier with a claim for reimbursement. Under such conditions, the risks of factoring increase significantly. If we are talking about factoring without recourse, then the supplier does not depend on the buyer's solvency, since the problem of non-payment is completely taken over by the intermediary. Consequently, the risk of non-payment for the goods is reduced to zero, while the debt is collected by the factoring company on its own.

In addition, such types of factoring as tender, which is provided for companies that have won a contract to sell products or carry out certain works, as well as factoring guarantee, in which a company providing goods or services is not given financing, is especially highlighted.

Open and closed factoring

In the first case, the factoring scheme differs depending on how knowledgeable the parties to the transaction are. In open factoring, both the buyer and the supplier are aware of the presence of the factor, which is reflected in the shipping documents. In this case, the debtor settles with the bank, to which the debt is fully assigned. With a closed type, the agreement between the supplier and the factor is confidential. The payer transfers the payment to the lender using the standard scheme, while the supplier returns it to the intermediary.

Factoring steps and process diagram

For a better understanding of the factoring scheme, let's look at a specific example of open factoring:

The lender provides its customer with services, or the goods of interest to him with a deferred payment.
The creditor transfers to the factor a statement confirming the appearance of accounts receivable for the goods or services provided.
The factor breaks off a significant portion of the debt. In this case, the amount of the posting in favor of the vendor can range from 70% to 95%.
The debtor pays off his debt for goods or services.
The lender and the factor make the final settlements. The firm returns to the factor the funds previously paid by him with the interest established by the agreement, and the bank acting as the factor gives the creditor the rest of the funds (depending on the terms of the agreement, this balance will be from 30% to 5%). This is the final stage of the factoring transaction.

This example covers the stages of closed-type factoring. In the same case, if the parties work according to an open scheme, the creditor receives from the bank 100% compensation of the amount for goods or services, respectively, the last stage in this scheme is missed.

The advantages and disadvantages of factoring

The effectiveness of factoring lies in the fact that its mechanism allows the supplier to significantly reduce their risks. It is important that when receiving funds under the factoring scheme, the provision of collateral is not required. However, the benefits of factoring are not limited to funding alone. The intermediary assumes many other functions related to the management of accounts receivable: keeps records of payments, monitors maturity dates, provides accounting and statistical debt management, prepares financial statements. Eliminating the additional burden allows the company to concentrate on its core business. Thus, the use of factoring can significantly reduce organizational costs. As for the buyer, he has the opportunity to receive an additional deferred payment, as well as agree on a convenient payment schedule.

However, if we analyze the reviews, we can conclude that there are also disadvantages of factoring. First of all, this concerns the high cost of services, as a result of which some companies prefer a loan. In the event that buyers consistently pay on time, which ensures the rhythm of deliveries and payments, then attracting a factor is inappropriate. Less attractive is recourse factoring.