The Bao Lyon Group, LLCFactoring & Financing
What is the Financial Factoring?
In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount- typically 10 to 20 percent**. The factor pays 65 percent to 75 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays.
Because factors extend credit, not to their clients but their clients' customers, they are more concerned about the customers' ability to pay than the client's financial status. That means a company with creditworthy customers may be able to factor even if it can't qualify for a loan.
Factoring is not a loan; it does not create a liability on the balance sheet or encumber assets. It is the sale of an asset--in this case, the invoice. And while factoring is considered one of the most expensive forms of financing, that's not always true. Yes, when you compare the discount rate factors charge against the interest rate banks charge, factoring costs more. But if you can't qualify for a loan, it doesn't matter what the interest rate is. Factors also provide services banks do not: They typically take over a significant portion of the accounting work for their clients, help with credit checks, and generate financial reports to let you know where you stand.
What are the functions of the factoring company?
- Assume currency risk (if the invoice is in foreign currency).
- Perform collection management.
- Make effective recovery of the claim and advise your own insurer.
- Advise customers about the financial health of borrowers (debtors).
Advantages and disadvantages
- Time savings, cost savings, and obtaining accurate reports.
- It allows maximum mobilization of the portfolio of debtors and guarantees the payment of all of them.
- You can receive advances on receivables.
- Reduces the indebtedness of the contracting company. No debt: outright purchase without recourse.
- Simplifies accounting, factoring contract by the user happens to have one customer, who pays cash.
- Sanitation customer base.
- It can be used as a source of funding and obtaining resources circulating.
- Invoices provide collateral for a loan that otherwise the company would not be able to get.
- The factor can not accept some documents from his client.
- It is not a form of long-term financing.
- The factor will only buy the Accounts Receivable you want, so the selection will depend on the quality of them, ie, their timing, amount and recoverability.
- The customer is subject to the discretion of society factor to assess the risk of individual buyers.