Share of factoring. What is factoring - a complete overview of the concept for beginners. By risk sharing
The economic literature provides various interpretations essence of factoring. At the same time, its definition as a commission-intermediary and credit operation is the most common.
is a type of trade and commission transaction, combined with lending to the client, associated with the assignment by the client-supplier of the factoring company of unpaid payment claims for the delivered goods, work performed and services and the right to receive them.
Thus, factoring includes collection of customer receivables(receipt of funds by payment documents), lending and a guarantee against credit and currency risks.
The term "factoring" (from the English factor) is an agent, intermediary, broker.
There are three parties involved in factoring transactions:
- factoring company (or factoring department of the bank);
- client (creditor, supplier of goods);
- enterprise (firm) - the buyer of the goods.
Functions and benefits of factoring
The attractiveness of factoring is due to the fact that it combines several functions at once:
- first, working capital financing;
- secondly, collection of the client's debt;
- thirdly, if it is stipulated by the contract, factoring assumes the risk of non-payment, thus acting as an insurer of financial risks.
Such a complex of functions makes factoring an indispensable mechanism for small and medium-sized enterprises, whose access to credit is traditionally difficult.
In addition, factoring has a number of advantages over other financial instruments. Firstly, it does not require the provision of collateral in the traditional sense, therefore it is available to a wide range of small and medium-sized companies, including those just starting out. The second advantage is that with factoring there is a 100% targeted use of funds, while usually, when a company attracts loans, it has a constant minimum balance on the account. Therefore, in reality, the borrower pays for the loan more high stakes than formally established. In factoring, this situation is impossible. Thirdly, it allows you to save on income tax. In accordance with modern tax legislation, this tax must be paid "on sale", i.e. from the date of actual shipment of the goods. However, if the company provides a deferred payment (commercial credit) to its customers, then the funds for the shipped products arrive later. Thus, in practice, a situation arises when the obligation to pay income tax arises before the funds from the sale are received. Factoring avoids this situation.
Factoring(from English word"factor" - trading agent, intermediary) is a set of services related to financing, covering the risk arising from the provision of a commodity loan, as well as the collection of receivables. It is provided to suppliers who work with their customers on a deferred payment basis.
The essence of factoring is that the supplier (manufacturer, seller) receives most of the funds practically upon delivery. The buyer receives the goods with the right to pay for it later, and the company providing such a service receives a commission.
Participants in the process and services provided
During the factoring process, there are three sides. These are the supplier (lender), the buyer (debtor) and the intermediary (factoring company), which provides the supplier with the opportunity to receive money for the goods immediately. Sometimes factoring services are provided by ordinary banks, but the essence of the transaction does not change from this.
The main service provided by factoring companies (FC) is the provision of funds to pay for the delivered goods, which, in fact, is a loan to replenish working capital.
However, this method of raising funds has several advantages before a regular bank loan or overdraft. Here list some of them:
- Does not require collateral.
- No hidden fees.
- Absence of bureaucratic delays.
- Allows you to increase the amount of lending depending on the needs. To receive funds, it is enough to present a document confirming the fact of delivery.
Financial companies do not have the right to be limited only to financing the supply of goods. Such organizations, according to the law, must provide at least two services from the list below:
- Financing against the assignment of a monetary claim.
- Insurance possible risks default.
- Supplier accounting.
- Collection of receivables.
Thus, factoring is able to serve the entire commodity chain in terms of financial logistics.
Mechanism and scheme of action
A typical mechanism of factoring is that the supplier provides the FC with commodity documents confirming the fact of delivery. After which he has the opportunity to immediately receive 80-90% from the amount of the shipment.
Further, the buyer pays the full cost of the goods within the agreed timeframe, transferring the money to the account of the company providing factoring services, and the supplier receives the rest of the amount, minus the commission. The amount of the commission depends mainly from the amount of deferred payment.
Legally, such an operation looks like an act of transferring receivables with all the ensuing consequences. Although in fact she has a number of features.
Existing species
Exist two main types of factoring. This is factoring with recourse And without recourse.
In the first option, the responsibility for non-payment of the debt by the debtor lies entirely with the creditor. If the debt is not repaid by the buyer in fixed time, then the supplier of the goods must pay it.
When concluding an agreement on the provision of factoring services without recourse, the FC assumes responsibility for collecting the debt from the debtor. This method looks more attractive, but due to the increased financial risk, it is characterized by higher commissions.
Factoring is also internal And external. Internal is when all operations are performed within the same state. External, it is also called international (international factoring), occurs when the FC and the supplier are located in different countries.
Factoring service can be rendered with notification of the debtor. In this case, factoring is called open. If the debtor is not informed about the service, then such factoring is called closed.
With the development of digital document management, electronic factoring. It compares favorably with the traditional one in that it allows you to instantly and automatically carry out transactions based on electronic documents.
Application in banking
In the ratings of Russia's leading factors in the forefront are specialized companies. However, if you look closely, you can see that most of them are part of financial groups headed by bank. For example: 
- VTB Factoring — VTB;
- GPB-Factoring — Gazprombank;
- RB Factoring - Rosbank Group.
However, many banks provide financing services in exchange for receivables without creating separate structures for such purposes. This is how the following organizations:
- Alfa Bank;
- Petrocommerce;
- UniCredit;
- Metallinvestbank;
- Promsvyazbank and others.
The difference in the quality of service between a bank and a specialized structure is small. But a client cooperating with a bank on factoring is more likely to receive profitable loan and faster service.
About what factoring is and what types of it exist, the chairman of the board of the bank "National Factoring Company" R. V. Ogonkov will tell in this video:
Benefits and Risks
The advantages of factoring are more than clear to every entrepreneur. Payment for delivery without delay allows you to more accurately plan financial flows, accelerate the turnover of capital, and, consequently, increase the level of profitability.
With equal initial conditions factoring allows you to increase turnover twice as fast as in the case of lending to replenish working capital.
FC, subject to the existence of an appropriate agreement, is able to take on a significant part of the financial risks. However, in such cases, the cost of its services will be slightly higher. Very often, this approach is justified, as it frees the lender from the worries of obtaining payment from problem buyers.
When recourse factoring there is a risk that the buyer will not cover receivables on time. Then the FC will have to compensate for the missing cash on one's own. Therefore, working on such conditions, it is necessary to carefully select buyers.
Examples
Consider an example factoring without recourse.
Firm "A" sells a batch of food products to firm "B" with the condition of deferred payment for 3 weeks. The factoring company rates its services at 2% for each week of delay. Therefore, the service delivery process will look like this:
- Firm "A" ships the goods to firm "B" and sends a document confirming the transfer of goods to the FC.
- FC immediately transfers 90% of the value of the goods to the account of company A.
- Company B makes payment for the goods received two weeks later.
- FC transfers the missing amount to the account of company "A", minus 6% commission.
If the company "B" refuses to fulfill its obligations, then the company "A" assumes all costs.
When a factoring agreement with recourse is concluded, in case of non-payment for the goods received, the FC takes on the function of a collection company. After the return of the debt, the supplier company receives the missing amount in accordance with the conditions specified in the factoring agreement.
IN Russian Federation factoring was recognized at the official level in 1992, when it was released law "On banks and banking activities" and this type of service was included in banking operations and transactions.
The concept of factoring is fixed at the legislative level. All transactions related to this type of service are regulated by Chapter 43 of the Civil Code of the Russian Federation “Financing against the assignment of a monetary claim”. Given the undoubted benefits that this progressive method of lending brings to the state economy, the legislation is constantly being improved and updated in accordance with international standards.
There is a professional public association of factoring market participants (AFC) in Russia. About 91% of the factoring market turnover is accounted for by this association.
Leading companies providing services to domestic market are considered:
- VTB Factoring;
- Life Factoring;
- OOO SBERBANK FACTORING;
- Bank National Factoring Company.
Since 03/01/2015 Russia has been a member of the UNIDROIT Convention, which is backed up by law No. 86-FZ and allows Russian companies perform factoring under foreign economic contracts.
It will help to understand the benefits and risks of factoring, as well as reveal the mechanism of factoring CEO"Russian factoring company" Elena Gladkikh in the following interview:
What is factoring: detailed description + history of development + forms of factoring + 2 steps in processing a factoring transaction.
Factoring is a profitable service of banks or specialized offices.
It gives you the opportunity to develop your business and not get hung up on debt obligations to employees.
Using factoring services, a small entrepreneur gets a chance to rise “from the bottom” as quickly as possible and switch to new level business.
From the article you will learn:
- What is factoring and what is it served with?
- How to use it correctly?
- What form is better to choose for solving your particular situation?
What is factoring: a detailed description of the service
Factoring is a service related to the payment of receivables to a creditor at the expense of an intermediary - a factor company.
If you try to explain the essence of the service in a simpler way, it is worth describing factoring using an example of a real situation:
StroyMaterial LLC completed an order for the production of 40,000 boards. The customer (StroySpektr construction equipment store) accepted the goods. But you can't pay right away. The head of the manufacturer decides to support the customer, thereby acquiring a permanent customer. Therefore, he gives an installment plan for payment - 90 days.
At first glance, everything is natural.
In any case, the manufacturer will receive his payment as soon as the sale of the goods reaches the final stage.
But for 90 days (as much as 3 months!), StroyMaterial LLC will not be able to receive payment. But workers must receive money for their work, and funds are also required for the purchase of material.
Way out: use the services of a factor company that will pay about 90% of the debtor's debt. The right to collect debt passes to the factor.
IN this case, "changing the terms" radically changes the result. The remaining 10%, taking into account the payment for services, the factor pays to the creditor-client after StroySpektr repays the debt.
What are the benefits of factoring services?
The benefit is obvious: instead of waiting for the repayment of the loan for the products provided, StroyMaterial LLC can again invest in the functioning of its enterprise and further.
To understand the absolute size of the factoring market, consider the chart below:
History of factoring development
And yet, the article cannot do without a small share of historical facts.
To understand the essence of this service better, it is worth knowing how the very concept of “factoring” originated.
Back in the 17th century, Great Britain was ahead of global community by organizing the so-called House of Factors. The factors were a kind of prototype of a quality dealer that can work on the basis of the factoring procedure.
In the 19th century, the North American community began to suffer losses from the increase in customs duty by the countries of Western Europe.
As a result, entrepreneurs could not ensure the production of products. The cost of its implementation has become so high that there was simply no money left for manufacturing!
A way out was found: banking organizations introduced factoring into fashion, thereby supporting their own firms and making it possible to make a leap in the growth of production.
Beginning in 1960, America was able to reverse the pressure of the Europeans, and a tough confrontation of business ideas began.
The two camps of entrepreneurs and banking systems clashed, and a bloody battle for world domination was expected.
During this period, Europe adopts the experience of a competitor, and begins massive support for its business - it opens factoring companies based on existing banks.
The 60s of the XX century can be described as the period of the birth of "whales" in the ocean of business support: IFG (International Factors Group) and FCI (Factors Chain International).
The present period differs in only one point: factoring has spread throughout the world and is a model of support.
The history of factoring development gives an understanding of the essence of this service.
But, this article will expand not only your knowledge of history. The main goal is to determine the scope and forms of factoring from the point of view of jurisprudence.
What is factoring: forms of service provision
If you suddenly thought that factoring is monotonous in its manifestations, it is not.
There are several main forms of service provision:
| Form | Definition |
|---|---|
| Open | A mode of service provision in which both parties to a commercial transaction are aware of the use of services. |
| Closed | The debtor is not aware that the payment is being made to the account of the factoring company. |
| With regression | Provides for a situation where the debtor does not pay the debt. In this case, the debt falls on the shoulders of the creditor who used the factoring service. |
| No recourse | The factor company undertakes to cover the costs of the creditor even if the debtor has not repaid the debt. |
| External | Both parties to the agreement on a commercial transaction are located in the territory of different states, and their enterprises are registered there. |
| Interior | The creditor and the debtor are located on the territory of the same state, which simplifies the process of conducting the intermediary's activities. |
Today, companies providing factoring services determine the form of specifying the service in accordance with the credit history of customers.
Only after analyzing the work of your enterprise can you be assigned to a certain group.
The diagram presented to your attention shows the percentage of factoring forms described above:
Based on the data in the diagram, most services are provided in an internal regressive form.
It is very simple to explain this - this option is most beneficial for factor companies.
Registration of a factoring transaction
Now you, dear reader, will definitely be able to distinguish factoring from the lending process.
Only one left to explain important point: how to properly execute a factoring transaction, and what is required for this.
STEP 1: Analysis of the risk of making a deal
The factor conducts a lot of activities dedicated to the analysis of the solvency of the creditor and the debtor.
Studying credit history- Mandatory verification step.
After evaluating the reliability of both parties to the contract, the factor turns to the creditor and offers a form of service.
He also argues why the choice of a particular degree of risk is connected.
Depending on the risk, both the cost of the factor's services and the amount of the initial payment to the creditor may fluctuate.
STEP 2: Conclusion of an agreement on the execution of the transaction
There is no clear form by which you need to fill out the contract. But, in any case, it should include the following items:
- payment for factor services;
- the amount of payment at each stage;
- indication of the period of the last date of payment by the debtor;
- action plan in case of non-payment of the debt by the debtor, the reaction of all parties to the transaction;
- obligations and rights of each party to the contract.
All unpredictable situations related to payments are resolved according to the force majeure action plan.
From the video you will learn how factoring differs from a loan, as well as its main benefits:
What is factoring? This article was devoted to this issue.
In short, this term can be described in a few words - a service related to the early payment of debt obligations by participants in commercial transactions.
For an entrepreneur, factoring is a way to develop your business to higher forms.
Resolve expansion issues entrepreneurial activity without solving financial problems is impossible. Factoring allows you to receive your funds in right moment and point them in the right direction.
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Factoring is a complex of services, the most important link of which is the assignment (sale) of the company's receivables.
Factoring in simple terms
Let us analyze the above definition in more detail and explain it in simple accessible words. The essence of factoring is very simple, if we discard specific terms, it is not difficult to understand it.
The debts of some companies to others is a normal and widespread phenomenon. It is debts in favor of a particular company that are called its receivables. How does it arise?
For example, a wholesaler can ship a consignment of goods to the buyer, and the buyer pays off with him not immediately, but after a week (for one reason or another). Or: a consulting firm conducted an analysis of the business of another organization, presented its recommendations, fully fulfilling the terms of the contract. The client firm, under the same contract, must make payment within 10 days (not instantly).
Obviously, delays in payment seriously interfere with business, reducing its sustainability and ability to develop. Returning to myself a simple example- trade - until the buyer has paid the invoice issued by the wholesaler, the seller cannot purchase a new batch of goods to serve other counterparties.
The essence of factoring lies precisely in the elimination of these delays. A third party (a bank, a specialized factoring company) redeems the obligations of the buyer, providing the seller with "live" money immediately after the sale of the goods. Of course, this is not done for free - however, the possibility of uninterrupted functioning of the business usually makes it easy to "recapture" the commission of the factor.
Factoring mechanism
The mechanism is quite simple, difficulties in understanding arise due to the need to have a good understanding of the roles of the participants in the transaction.
Here are the usual steps in the process.
- The client of the factoring company provides services or provides the buyer with goods and services with a deferred payment.
- The client (seller) transfers to the factor documents confirming the fact of the appearance of receivables.
- The factor covers most of the debt (up to 95%).
- The debtor makes payment for goods or services.
- The lender and the factor make final settlements between themselves: the bank receives back its money with an additional commission for services, the seller receives the rest of the funds due to him (5 - 30%).
For final clarity, check out the diagrams.
Factoring scheme
This is the simplest option - closed type. The factor makes settlements only with the creditor.
In more difficult variant- open - there is a relationship between all three participants. The buyer pays already with the bank - that is, the debt is completely usused by the factor.
The remaining steps are similar to the first scheme. Of course, the differences in the workflow are quite significant.
