What is factoring in simple words? Types of factoring Factoring mechanism.

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

The advantage of this scheme is obvious - the seller receives money immediately, which he can use at his own discretion. The bank (factoring company) has its own margin on this operation - a certain percentage of the amount of purchased 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 the factor. At the same time, the seller does not experience any problems associated with a lack of funds. The factor receives a commission for providing services to the seller. The buyer has the opportunity to defer payment. This is how the factoring scheme looks most simply:

Please note that not every receivable can be factored. The debt is subject to a thorough check at the preliminary stage, where the reality of its collection from the debtor, and, consequently, his financial condition is assessed. Also, the package of documents for factoring will be checked by bank specialists and it must meet strict requirements - both legislation and bank requirements.

Factoring with financing and factoring without financing

Factoring with financing involves 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 regarding quality, quantity, or product parameters. The bank's margin can be expressed as a percentage of the transaction or commission.

Factoring without financing involves transferring to the factor the right to receive proceeds. That is, the bank does not pay the issued invoices instead of the buyer (as in the first case), but on the basis of invoices received from the seller, it demands payment from the buyer on the terms and within the terms 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 the participation of the factor company (bank) in the payment process. The buyer is notified of the bank's participation in the settlement process.

With closed factoring, the buyer is not notified of the participation of a third party - the factor - in the calculations. The buyer makes payments in accordance with the agreement with the seller of the products, and he independently makes payments with the factor to repay the payment.

Factoring with recourse and factoring without recourse

Factoring with recourse 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 the majority of the buyer’s receivables as soon as possible (for example, 95% of the debt upon concluding a factoring agreement, the rest when the debtor fulfills its obligations). Transactions of this nature – factoring with recourse – occupy about 88% of the share in the volume of factoring transactions.

Non-recourse factoring provides for the factor company to fully assume the risk of non-payment by the buyer of the amount of receivables, which greatly affects the rate for the use of funds and makes this type of factoring the least common in practice.

Domestic factoring is carried out provided that all parties involved are located in the same country.

With external factoring, the parties are located in different countries, and the factoring agreement is most often concluded for part of the debt existing in a specific country within one or more buyers. This is also called entering into a global assignment agreement.

Possible reasons for refusal 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 and sell” scheme - the so-called “flip” among the people.
The product under the factoring agreement raises doubts regarding its quick implementation and liquidity
The organization acts as a subcontractor
The organization carries out retail trade in small quantities of goods
The organization also uses non-monetary forms of payment

So, let's summarize the above. Factoring can be classified as an active banking operation that involves the assignment of rights to monetary claims. Each of the parties involved can derive a certain benefit from this operation - timely payments for the supplier, deferment for the buyer, commission for the factor. The factor can be either a bank (most often in practice) or a specialized factoring company. Not every debt is subject to factoring, and not every debt will receive the opportunity to be financed by assigning a monetary claim.

You have a small company, and you have won a tender to supply 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 to supply goods or services is to work on prepayment. But this does not always happen, especially if the company operates in a “buyer’s market” - an area where the buyer dictates the terms of delivery. Given the high density of the corporate and public sectors in the economy, almost all small or medium-sized businesses that want to earn serious income have to deal with a similar scheme. Corporations also most often interact with each other on deferred payment terms.

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

Video: What is factoring

The history 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 a 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 attracted as working capital for large transactions. However, so far only less than 1% of transactions in the commercial sector (not counting banking) are carried out 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 find it easier to give a loan against collateral rather than check the solvency of the buyer of a particular product.

In legislation, a 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

As you study this article, you will come across the following terms:

Factor or financial agent, intermediary- an organization that handles funds. The conclusion of agreements for the assignment of rights to monetary claims is exempt from licensing. The law introduces restrictions 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, an intermediary can be either a credit institution (banks, microfinance organizations) or any enterprise, regardless of its organizational form or composition of founders. In Russia, most factoring operations are carried out by banks or specialized subsidiaries and branches created by them.
Client, creditor- a seller who has released goods (performed 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 work (services) were performed with the condition of payment for them after a certain period.
Provider– the creditor’s counterparty supplying him with materials (goods) or performing work.
Factoring company is a company providing factoring services.
Factoring agreement– a legally drawn up document that regulates the relationship between the parties to a factoring transaction, describes the rights and obligations, and liability in case of violation of obligations.
Factoring operations– these are actions aimed at providing the factoring service itself. The operations are: analysis process financial condition of the buyer, his solvency, transfer of invoices, transfer of funds to the parties involved in the transaction, etc.
Factoring services- this is a set of measures to ensure a factoring transaction on the part of the factor (bank or factoring company), which primarily includes ensuring the financial expenses of the seller (client) 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 providing 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 is factoring needed?

Entrepreneurs often try to resort to factoring, like a regular loan, in force majeure circumstances. However, this is when it is most difficult to negotiate 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 deferred payment scheme 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, so factoring often turns out to be a more logical option: the bank’s attention is drawn less to the seller and more 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 a 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 efficient use of the high profits from transactions. Simply put, after receiving payment for a delivery, money is invested in development, and not in repaying debts incurred while waiting for payment.

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

Who is involved in factoring?

Factoring is a three-party transaction. The following parties are involved:

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

2 Buyer (debtor) is a legal entity purchasing a product or service on deferred payment terms.

3 Factor – 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 cost of goods supplied or services provided and receives a commission for this. After the conclusion of the contract, the right to collect receivables from the buyer passes to the factor.

Factoring transactions can be divided on several grounds.

On risk sharing:

Factoring with recourse(regression factoring) is when the bank (factoring company) does not assume the risk of non-fulfillment of the contract by the buyer. If the latter ultimately does not pay the factor for the goods received, the transaction documents are returned to the seller, who fully compensates the bank for the money spent and then collects the debt from the buyer for the transferred goods. This type of factoring is rare, since it is unprofitable for the seller and is used only in very desperate situations.
Factoring without recourse– the bank assumes all risks in 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.

According to the degree of buyer information:

Open factoring- this is when the seller informs the buyer that the right to demand payment under the purchase and sale transaction has been transferred to the factor, and the buyer must make 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 then transfers the money to the factor.

According to the tax accountability of the parties to the transaction:

Domestic factoring– the seller, buyer and 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.

Upon the occurrence of the buyer's obligation:

Real factoring– the contract between the seller and the factor is concluded after 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 takes part in the transaction. This is the most common scheme.
Mutual factoring– two factors are involved in the transaction, with one acting 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 behalf.

According to the range 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.
Wide (conventional) factoring– the factor provides full support for the client’s receivables, including the preparation of all documents, accounting services, insurance, and extended consulting.

By type of document flow of the transaction:

Traditional factoring– transaction using paper document flow.
Electronic factoring (EDI factoring)– the transaction is executed using exclusively electronic document management.

How does a transaction using factoring work?

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

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

2 The seller and buyer agree to involve a third party (factoring company or bank) in the transaction.

3 An agreement is concluded between the seller and the factoring company, the delivery of invoices (if the goods have already been delivered) or invoices, as well as copies of the agreement between the seller and the buyer are transferred to it. At this stage, the factor checks the financial condition of the buyer, his solvency, financial discipline (execution of such contracts), as well as the status of the debt - delay is unacceptable. The contract must stipulate the following points:

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

4 The factor pays up to 90% of the cost of the goods (according to invoices) if the goods are shipped, in rare cases - up to 100%. A fee is charged at this stage.

5 Payment by the buyer for the goods received. The money is transferred by the buyer to the factor's account. In closed factoring, money is transferred from the buyer to the seller, and then from the seller to the factor.

How is a factoring transaction controlled?

A 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 requirements of the factor 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 violation of obligations by the parties to the transaction: the factor can make 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 factor’s debtor.

Also, the client and his buying partners are constantly re-evaluated.

Pros and cons of factoring

Advantages	Flaws
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 buyers and 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 payment of income tax. With a regular deferment of 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 on the seller’s balance sheet.	-
Additional attractiveness of the company for clients due to deferred payment.	-

You can simply call the first bank you come across or the first advertisement you see, but it is better to choose a factoring company based on the specific goals of your business. The selection algorithm could be like this:

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

2 Choose between a bank and a factoring company. The first option is more convenient if you have significant turnover (for example, Sberbank Factoring works on transactions from 10 million rubles), and also if you plan to transfer to a factor the management of all receivables 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 significantly smaller amounts than banks. Tariffs in each case are set individually, so there is no point in comparing them with banks and factoring companies.

3 Collect feedback on the factor. Isolate clearly custom-made ones in order to create an objective picture.

4 Analyze the cost of the factor’s services, 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 payment processing time 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. The majority of this amount consists of funds from state banks provided to cover the cash gaps of credit institutions being rehabilitated by the Central Bank of the Russian Federation. If we talk about the TOP 5 banks providing factoring services to “regular” businesses, the list will look like this*:

Here are the TOP 10 banks by volume of factoring financing in 2017*

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

*according to the Association of Factoring Companies for 2017

Among the huge number of loan products for small and medium-sized businesses, factoring occupies a special place. This service allows sellers of goods to protect themselves from non-payments, and buyers to guarantee uninterrupted supplies even if there is insufficient funds in their accounts. Factoring services have 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 assessing parties to transactions, as well as our own system for monitoring deliveries and payments.

The essence of factoring financing

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

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

The seller receives several advantages at once:

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

Factoring can be carried out in two types: with or without recourse.

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

It is worth highlighting factoring without notice. In this case, the debtor himself is not notified that deliveries and settlements now occur through the factor. Transfers of funds can be made to the seller's current account at the factor bank.

Most often, the seller applies for 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 terms of deferred payment. But sometimes a buyer applies for factoring services. In this case, the procedure for purchasing wholesale quantities 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 delivery agreement, to defer payment for a period of 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 cost of all goods according to the invoice, and the debtor, in turn, transfers the entire amount of the debt to a factoring account with the bank.

The bank, having received the transfer, charges a service fee, for processing data on invoices, and interest on the amount of financing for the actual number of days of using the loan funds. After this, the principal financing debt is repaid from the proceeds, 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 documentation;
signing an agreement on factoring services, as well as related documentation (bank account agreements, guarantees, etc.);
sending notifications to buyers (debtors) about the need to transfer funds to a specialized account opened in a bank in the name of the seller;
receiving delivery notes and invoices from the seller for shipped consignments of goods, assessing the supply agreement and its compliance with the terms of the invoice, entering supplies into the database;
transfer of the financing amount to the seller’s account, intra-bank accounting of the volume of claims and payments;
tracking of overdue deliveries (that is, those for which the deferred payment has already ended and payment has not been received from the debtor), sometimes in this case the client can confirm in writing the closure of this delivery, and no recourse claim will be made;
accepting incoming payments from the debtor, posting them among deliveries, accounting for interest paid and returning overpaid funds to the client.

Factoring company

It is not so important who provides financing - a bank or a factoring company. The main difference between a bank and a factor company is its operating standards.

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

The factoring company, in parallel with financing, provides full support for receivables and participates in resolving disputes with debtors.

Small Business Use

The SME segment is one of the most sensitive to 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 transaction reliability.

Basic advantages of factoring for this business segment:

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

Advantages and disadvantages

Even in times of crisis, banks are constantly developing a list of loan 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 smaller companies.

Factoring helps to use loan funds with maximum benefit and minimal overpayment.

However, this product also has its own flaws:

quite high price - about 15-20% per annum;
the need to provide information about debtors;
limited financial flow by sales volumes;
In factoring, only supplies are used for which payment is made in non-cash form.

Positive aspects factoring is much more:

no collateral;
the ability to transfer control of receivables to a third party; banks and factoring companies record all deliveries in their accounts, even those for which financing is not provided;
large 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 risk of non-payment from the debtor is borne by the factor, while the business is guaranteed timely receipts to the account;
Reducing cash gaps allows you to plan financial flows more effectively.

Factoring, calculation example

Let's look at a simple example:

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

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:

(100000*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 deferment period, will more than compensate for the small overpayment for the short period of use of the factor’s funds.

Video - what factoring is in simple terms:

Speaking about factoring, what it is and how to describe it in simple words, we end up with the following definition: a set of financial services for deferred payment, which are agreed upon between manufacturers and traders. That is, the supplier sells the goods to the buyer and does not require immediate payment for it. Factoring operations are tools that allow an enterprise to obtain financing from a bank against receivables.

Economists believe that we are talking about the procedure for trading debts, and the discovery of factoring is attributed by historians to the times of antiquity.

Let's move on to a description of factoring, based on expert ideas about what it is.

Factoring financing mechanism

The scheme of operation of such a financial mechanism is curious. After all, many companies use it to pay their counterparties. Here, no collateral is practiced, and limits are set differently.

The factoring scheme looks like this - the supplier of the factoring company acts in such a way that services and goods are provided to the buyer with a deferred payment, and in the meantime, documents confirming the delivery (waybills, invoices) are transferred to the bank.
Then the supplier receives money from the bank (up to 9/10 of the delivery amount).

And when the deferment period ends, the bank receives the entire amount from the buyer and transfers the remaining funds, minus its commission, to the supplier company.

In this case, the factor is the bank itself, which has the entire amount of necessary information and its own methodology for assessing the solvency of the company’s counterparties.

If companies establish cooperation with the maximum number of debtors, especially by providing them with deferred payments, then all produced volumes will be quickly and correctly sold.

Factoring services have proven to be a successful scheme, and this allows enterprises to optimally combine their financial prospects, built on the effective management of cash flows, with the holistic development of production.

Types of factoring

open or confidential (closed);
domestic or international;
with and without the right of recourse.

With regression

The regressive type of factoring is the most relevant and is more popular than other types. The benefits of factoring with recourse are obvious specifically for clients, because this is basic insurance in the event that the debtor (client’s buyer) for some reason refuses to pay or delays it beyond the deadline - then the client returns the money to the company.

The main and significant advantage of factoring with recourse is a good increase in sales, because under these schemes any banking organizations will agree to work with it, and even with collateral. The money is immediately credited to the account and is already working for profit, which can only be interrupted by the fact that the debtor is declared insolvent.

No recourse

With non-recourse factoring, as experts understand it, the risk of non-payment of debts is assumed by the factoring organization. The risk of non-payment is immediately included in the cost of the service, so non-recourse factoring costs the seller more than recourse factoring. The factor conducts a thorough analysis and determines the debtor's solvency. As a result, the client is guaranteed full payment.

A convenient opportunity is provided by the “Guarantee for Buyers” service.

work with customers on deferred payment terms;
provide preferential payment terms to customers;
start working with new buyers (by checking the solvency of potential buyers, as well as their ability to sell a given volume of goods);
entering new regions (guaranteeing new customers in new markets and territories).

Relationships of this type carry less risk for the factor, and the commission for services, of course, is significantly lower: they are affordable.

Shipment of products.
Transfer of information on deliveries to approved buyers.
Issuing a guarantee for buyers for 90% of the delivery amount.

If the buyer does not fulfill his obligations to pay for the delivery, it is necessary to transfer the original documents that confirm the validity of the monetary claims against the buyer.
Payment under the guarantee is carried out within 4 months.

Purchasing

Another interesting type of factoring service is called purchasing (reverse).
The term “buyer factoring” is sometimes used because it accurately expresses its essence. A buyer (debtor) comes to the factor and is interested in receiving goods on a deferred basis.
He resorts to the procurement type if he is interested in a transaction, but does not currently have the necessary funds, and the supplier does not want to cooperate without an advance payment.

International

International factoring is perhaps the only real financial instrument that allows deferred payment for international transactions. The supplier and buyer here are residents of different states. But the rules of ordinary trading do not apply here.

long-term, or even indefinite, action;
regularity of deliveries;
trend towards increasing trade turnover.

Open and closed

In the diverse gradation of factoring transactions “for three”, it is worth paying attention to the open and closed types of this pool of financial services.

With the open option, which is especially popular abroad, the debtor, having been officially notified in writing of the presence of the factor, transfers funds to his account. Moreover, sometimes a factor is not included in a tripartite transaction without the consent of the debtor. Closed factoring is an operation carried out only between the lender (seller) and the bank (or other factor). But the purchaser of services (goods) does not know about this.

The difference between obtaining a factoring agreement from a bank and a factoring company

Many entrepreneurs, for whom the services of a financial intermediary have suddenly become vital, are faced with a choice of whom to turn to - a bank or a specialized company. Today, both types of players are very successful in this market, but there is still a difference in the provision of factoring services.

First, let's take a closer look at the question - what is factoring in a bank? Many users note that banks have such an important quality as reliability; they also emphasize the versatility of services.

After all, to provide this financial service, businessmen need others, and banks that do not have restrictions in this sense are still a better option. A logical addition to factoring services is that banks offer settlement services.

But factoring companies have other advantages, the first of which is efficiency, which is ensured by special business processes. But in a bank, the speed of implementation of operations is reduced due to the workload of employees with administrative issues in working with other departments of the same bank.

With a regular loan, the agreement is limited in duration, but with this deal, the loan is unlimited.

The conclusion suggests itself: specialized companies are constantly improving their well-established technologies, but in banks they are more conservative, which reduces the quality of factoring services, and the volume too. Along with the mentioned efficiency, companies are more flexible in relation to the client.

The company's specialists have excellent knowledge of product features, and this allows them to take into account the needs of customers and adapt the product specifically for them.

In banks, a small staff and strictly regulated product parameters do not allow an individual approach to each client.

Conditions of registration

A factoring agreement, or what might be more clearly called an agreement to transfer the right to a debt, is, in simple words, the main legal document that fixes the relationship between the intermediary and the supplier (and, possibly, the recipient).

The law for this document provided for a number of nuances that are understandable at the expert level, but the main ones are the conditions of factoring regarding financing and the monetary claim assigned in order to obtain financing.

on what conditions funding is provided and in what order it is carried out;
description of the procedure for transferring rights to debt obligations;
the cost of the transaction and the procedure for transferring settlement funds.

Calculation example

Let's give an example of calculation for factoring.

On the 20th of the month, the wholesale supplier signed an agreement for the supply of goods with the Buyer in the amount of 500,000 rubles with payment due by the 30th of the same month.

The wholesale supplier urgently needs money, so on the 25th he enters into an agreement with the Factor, transferring to him the right of monetary claim against the Buyer.

On the 26th, the factor pays the Wholesale supplier 7/10 of the required amount - 350,000 rubles (this can be designated as a factoring loan).

On the 30th, the Factor issues a payment request to the Buyer.

In the Russian Federation, where banking institutions are the main factors in these operations, the volume of factoring turnover barely reaches half a percent of gross domestic product, while in the West it can sometimes amount to 1/5 of GDP.

On the 31st, the Buyer transfers 500,000 rubles to the Factor.

Of this, the Factor keeps the commission for himself, and transfers the rest to the Wholesale Supplier.

If, for example, we are talking about a commission of 3%, then this amounts to 15,000 rubles. That is, the Wholesale Supplier will receive from the Factor the last transfer in the amount of 135,000 rubles, and the total amount received by the Wholesale Supplier will be equal to 485,000 rubles.

Having lost only 3% of the amount on commission, using the factoring procedure, making simple entries in his accounting department, the Wholesale supplier received 70% of the entire payment at the right time.

This calculation of factoring is the simplest example, indicating the simplicity of the very scheme of relations along the supplier-factor-buyer line.

Watch a video about the concept of factoring.

How does factoring differ from forfeiting and assignment?

Very often, factoring and forfaiting are considered as similar mechanisms, but the differences between them are quite noticeable. The difference between financial transactions lies in the specifics of their implementation.

Forfaiting, which is important, is, in simple terms, a very long operation that can last several years, while factoring takes a maximum of six months. The forfaiter, who pays the entire amount at once, is ready to risk everything (even political interference), and the factor, which does not pay more than 90%, shifts part of the responsibility to the client, so that, if something happens, he can return at least some of his funds.

Forfaiting assets may well be sold to third parties, but factoring assets cannot.

The general purpose of additional financing does not negate the significant differences between factoring and. The first operation is voluntary, and the assignment can be determined by law.

The assignment does not have the nature of a restriction on property, and factoring involves the transfer of cash receivables.

Pros and cons of factoring

You can always calmly resolve financial problems without harm, without changing the rhythm of current production, using an effective and modern method - financing through a factor. However, as with any transactions and agreements, factoring has its pros and cons. The main advantages are to create favorable conditions for the debt to be repaid.

Enterprises that resort to factoring can overcome the financial crisis. The disadvantages of factoring are the complex terms of the contract, and by risking too high an interest rate, you can lose profit from the delivery. In addition, the documentation is not easy to complete.

Some positive and negative sides.

Watch a video about what factoring is in simple words:

Factoring can rightly be called the driving force of trade. It is not a luxury, but a means that stimulates the growth of production and sales - increasing the competitiveness of goods and expanding the circle of partners, providing them with favorable payment terms. This is a powerful financial tool with which companies' businesses can very quickly increase their sales.

Hello, dear readers of the blog site. Factoring is a new term from the world of economics. It means sale of debt an organization specializing in this for a percentage of the amount (a bit like collection services, but here everything is different).

To understand the essence, let’s break this concept down and explain everything in simple words with practical examples.

Important: Modern factoring involves solving financial issues only between the supplier of goods and the buyer.

The debt of the buyer of goods (a store, for example) is transferred to a third party (a factor - a bank, for example), and the seller (manufacturer of goods) immediately receives almost the entire amount of the debt from the bank. The bank then receives the debt (in full) from the buyer of the goods and its interest from the seller.

Can not understand anything? Why do you need a mediator out of the blue? Let's go into more detail and use examples.

The essence and history of factoring

Factoring is mainly used now to eliminate cash gaps when the supplier (for example, to large retail chains) receives money for the goods only after a month or even two. But he can’t sit without money all this time - it won’t take long for him to go broke.

Therefore, the supplier sells the “debt of the trading network to him” to such a player in the market (a bank or a special organization), receives most of the amount of the debt from him to his own account and successfully continues the business.

The factor (the legal entity that purchased the debt) receives the money from the debtor in full (after a while) and earns a percentage of the amount for its services (it is paid in this case by the supplier of goods to the retail chain). It's a lot like a loan, but no one will give you a loan for goods in the amount of 90% of its value (maximum 50%).

A business related to factoring came in 1985 (in the form of selling loan debts). The actively developing Promstroybank and Zhilsotsbank experienced acute problems. Then they applied a hitherto unknown foreign collection practice:

A third party, a representative of the collection company, is invited to participate in the “bank – credited person” relationship.
The collector immediately pays the bank 80-90 percent of the client's debt, after which the bank transfers the rights to collect the debt to this same collector.
The debt collector is collecting the debt. It operates more intensely than the bank, but never comes out.
Having received the money, the collector pays the owner the balance of the debt, with the exception of previously agreed upon interest and commission.

In case of factoring the scheme is very similar, but debts are redeemed not for loans, but for delivered goods. Although it’s hard to imagine this without preparation, so let’s look at a few practical examples.

Interesting: the first mentions of this kind of transaction (assignment of debt) are found in Mesopotamian manuscripts, which are more than 2000 years old.

Factoring examples

Before delving into the topic, I will immediately give several specific examples to more accurately explain how factoring works.

All names are fictitious, any similarities with reality are accidental.

Example 1

The small plant “Fish Canned Food” entered into an agreement for the supply of products with a large grocery supermarket. After delivery, the representative of “Canned Fish” receives an invoice confirming the fact of the transaction. Using this invoice, the supermarket will pay for the goods within sixty days.

A small plant cannot afford to wait that long, as it need working capital. Then he turns to the factor and “sells the debt to him.” The “sale” is that the factoring company immediately pays Canned Fish 90 percent of the supermarket’s debt.

In this case, the supermarket will no longer owe the plant, but the factoring company. Having received the money, the intermediary pays the remaining ten percent, with the exception of his own commission.

As a result, everyone is happy: the company sold the products and received working capital, the supermarket paid within a convenient period of time, the factoring company did its job and received money for it.

Example 2

The Titan steel plant entered into an agreement with Khoroshiy Stroitel LLC for the supply of fifty iron plates for 20,000 rubles each (total 1,000,000 rubles). According to the agreement, “Good Builder” pays 20 percent of the amount in advance and another 80 percent upon receipt.

“Good builder” 200,000 rubles, but does not pay the balance within a week. “Titan” urgently needs money to buy raw materials, so it turns to the “Grozny” factor. “Grozny” sets the following conditions: “I immediately pay 650,000 rubles and another 100,000 rubles after collection. 50,000 rubles is my commission.”

After legal registration, “Good Builder” owes 800,000 rubles not to “Titan”, but to “Grozny”. It is Grozny that now bears the risks associated with the return of money. This is an example already resembles collection activity, when a bank sells a citizen’s loan debt to a third party and that party takes all the risks of repaying it.

Types of factoring

Factoring is a commercial activity associated with great risk. Accordingly, there are several options for schemes for its implementation, which to one degree or another protect the interests of the factor itself (the legal entity redeeming the debts):

Factoring without recourse
The first variety to appear in the Soviet and post-Soviet space. In this case, if the factor for some reason was unable to collect the debt from the client, then he suffers all the losses himself. This is a more profitable, but also riskier type of activity. Collectors used to operate according to this scheme, which is why they collected debts so harshly.
Factoring with recourse
Recourse is a kind of insurance (a return claim for reimbursement of the amount paid if something went wrong). In this case, the borrower (seller of the goods) negotiates in advance with the factor the conditions under which the transaction can be canceled. If it is not possible to collect the debt from the buyer of the goods in full, then the client (seller of the goods and debt) reimburses the missing amount to the factoring organization.

Interesting: When executing a transaction with recourse, the factor pays up to one hundred percent of the debt amount in advance. This is understandable, because there are practically no risks in this case.

In addition, a distinction is made between closed and open processes.

Closed factoring is a transfer of rights to a debt without notifying the debtor. Like non-recourse transactions, this type of activity is gradually becoming a relic of the past. Today there are no longer cases where yesterday a client officially owed money to the bank, and today strangers with bits are already knocking on his door.
Open factoring- this is one in which the debtor is officially notified that he will now pay money to other people. A more civilized and modern way of doing things.

By the way, the last method is the safest for all parties. But I will describe “why” and who gets what (in terms of benefits) in simple and accessible words in the next section.

Factoring from the point of view of the parties to the transaction

It is clear that a factoring agreement carries both pros and cons for each member of the transaction. But for a better understanding, let’s look at the process, putting ourselves in the shoes of each of the three participants in the process.

For the buyer of the product (for example, a retail chain like Auchan)

The seller, like the buyer, receives not only benefits from working with the factor.

For the seller of goods (supplier, manufacturer)

Finally, the factor itself also carries a certain risk.

For factor

Interesting: the emphasis in the word factor in this case is on O.

What is forfaiting in simple words

Earlier in the article it was already mentioned that there are several types of financial interaction with debtors. One of them is factoring, but there is another very similar interaction process - forfeiting.

What are the differences? If factoring is the purchase of debt from the seller with the possibility of return, then forfeiting is the purchase of debt directly from the creditor with full financial risk. This means that the forfaiter who was unable to collect the debt will suffer losses personally in one hundred percent of cases.

Distinctive features of forfeiting:

Let's sum it up

So, here are a few basic facts about factoring transactions that are really worth remembering:

This process is a direct descendant of collection activities (which are many thousands of years old), as well as forfeiting.
Factoring is a transaction between three parties (buyer, seller and factor).
Forfaiting is a direct purchase of debt from the creditor by third parties (in this case, no one asks or notifies the debtor).
Factoring business is a modern and legal type of activity that minimizes the risks and inconveniences of all parties.

You can find out in more detail what this is, perhaps, only on forums, since sociable specialists in this field are a rarity.

Good luck to you! See you soon on the pages of the blog site