Domestic companies involved in the sale of goods often encounter a problem when, when selling their products only on an advance payment, most buyers can be scared off, and when applying a deferred payment, the seller loses a significant amount of funds in circulation that are necessary to finance business activities. This problem can be solved by such a thing as factoring. What is this procedure, and how can it be successfully used in the functioning of a business entity?
In accordance with applicable law, this concept means financing against the assignment of rights to a monetary claim. A factoring contract is often referred to as sales credit. Today, this procedure is carried out mainly by banks due to the presence of such a right in accordance with a special law.
However, any credit or commercial organization can carry out factoring. What is factoring? This is an activity that must be confirmed by an appropriate license. But today no regulatory document has been adopted that would regulate such licensing.
Typically, factoring is performed as follows. The company enters into a service agreement with a financial agent, which is indicated in this document as a factor. In accordance with this agreement, the seller, when selling the goods, does not immediately receive payment from the buyer for it, but cedes the right to demand this payment from the buyer to this financial agent. Interestingly, the supplier does not bear any responsibility for the buyer to pay money to the agent. The seller is obliged to notify the buyer in advance that factoring is used in their interaction, that such an event involves the interaction of a second person with the bank.
So, the supplier submits documents to the banking institution, which must confirm the actual delivery of goods or the provision of services with the condition of installment payment. And on that day the seller receives about 70% of the contract value. The percentage depends on the category of reliability to which the buyer will be assigned by the bank. The higher it is, the greater the amount the supplier will receive.
When the payment is due, the buyer must transfer the funds directly to the bank. In case of non-payment by the due date, a mechanism such as factoring begins to operate. What is the impact on the part of the bank implies by itself, we will consider further. The Bank carries out a series of actions aimed at collecting funds from the debtor. Upon successful repayment of the debt, the bank pays the supplier the remainder of the contract value minus the commission (about 3%) charged as a fee for the provision of such services.
To summarize, it should be noted that the supplier company using factoring has the opportunity to sell its goods with a delay (which is essential for the buyer). However, the seller does not withdraw a significant part of the funds from the turnover.