WHAT ARE BUSINESS FACTORING SERVICES AND WHEN TO USE THEM?
Factoring is one of the methods to ensure continuous financing for a company. It entails the purchase of rights to financial trade receivables before they become outstanding. This is a modern solution to financial liquidity problems and one of the most rapidly evolving financial services. Let’s see how it works!
Business factoring – operating procedure
Business factoring is a transaction involving three entities:
- Factoring agent – a company providing goods and services, thus being the seller of the receivables.
- Factor – a financial institution purchasing liabilities and providing funds.
- Debtor – a counterparty required to make a payment for the factoring agent.
The factor, i.e. an entity providing factoring services, purchases an entrepreneur’s non-overdue receivables from their counterparties. An advance payment is made to the factoring agent right after issuing the invoice. The percentage amount of the advance payment, along with its specific payment deadline and the factor’s commission amount are set forth in the factoring contract concluded by and between the company and the financial institution. It usually amounts to 80–100% of the invoice value. The remaining part is paid to the entrepreneur immediately after the liability has been discharged by the debtor. Should payments not be remitted on time, the factor is required to enforce them. They can divide the payment into installments or start court enforcement proceedings.
Business factoring – when will it be efficient?
Factoring is intended for companies that have long payment terms and want to secure themselves against insolvent counterparties. It improves their current financial liquidity and shortens the average collection period. This is especially important where the recipient’s funds have not yet been received, but the revenue had already been used and a tax liability was created. This is the perfect solution for companies seeking additional sources of financing and comprehensive services. Business factoring is also related to additional services, such as debt collection, settlement or payment monitoring. It is ideal for situations where the company has no credit capacity or the appropriate collaterals for a working loan, it cannot achieve financial liquidity or has a problem with liability management. Business factoring is therefore an effective and modern solution for entrepreneurs seeking a flexible source of financing and support in liability management.