It is common for a company to be obliged to provide customers with payment terms. Then appears a shift in the cash flow of the company she faces. In order to avoid such a delay, she has the possibility of transferring her bills to a specialist in the field. To do this, it can resort to factoring.
What is factoring?
The factoring or factoring is a debt collection technique. It is a contract established between an enterprise and a specialized credit company (called factor) by which the factor buys the company’s debts on payment of a commission. The invoice factoring companies are important there.
In other words, the credit company advances the amount of the claims to the enterprise, from which the commissions due are deducted. It is the factor who subsequently takes care of recovering the amount of the receivables.
In addition, the risk of non-payment is ensured by the credit institution which can not, in any case, blame the seller, discharged by the contract, of any liability.
Factoring, how does it work?
The selling company must obtain the consent of the factor for each of the customers. Attention, there is usually a ceiling per customer.
On the corporate side, factoring has many advantages:
The company no longer has to worry about the collection of amounts owed by its customers as well as the risk of non-payment of invoices.
It allows the company to recover its cash immediately and allows new companies to start well, no longer having to suffer the payment delays granted to customers and that generate a gap in cash.
The cost of factoring
- Thus, as explained above, factoring has a certain cost. The factor is paid two fees:
- The factoring commission which includes the collection, accounting and guarantee services.
- The financing commission corresponding to the cash advance; it is calculated in relation to the amount financed and the duration of the financing (this is in fact a pro rata temporis rate).
In addition, specialized financial organizations also offer a credit insurance service for companies wishing to protect themselves against the risk of insolvency on the part of their clients.
In contrast to confidential factoring, this factoring method offers the possibility of handing over a client claim while precisely indicating to the customer that the claim has been assigned to a factoring company. However, the company remains in this case the master of the management of the recoveries; the receivables are thus preserved by the company.
The only specificity of this method lies in the fact that factoring costs are calculated on the basis of a fixed price. This makes it possible to determine monthly the number of customer receivables to be entrusted to the factor but especially to know the exact amount of factoring fees.