Factoring happens. Factoring what is it

Factoring is used by the parties to a transaction for the supply (purchase and sale) of goods in cases where the buyer dictates its terms. To find out what factoring is in simple words, let’s look at the translation of the word. Translated from English, the word “factoring” means “mediation”. The transaction is regulated by Art. 824–832 of the Civil Code of the Russian Federation. This is a financial service from a bank or commercial company to legal entities. The bank pays the supplier for the goods and then collects the debt from the buyer. Delivery of goods under a factoring agreement with deferred payment allows the supplier not to divert funds from circulation for a long time.

In simple terms, factoring is a way to quickly restore the supplier’s working capital using the funds of a bank or factoring company in a purchase and sale transaction. With factoring, the seller delivers goods to the buyer on deferred payment terms.

The debtor (debtor) is the recipient of the goods, who ultimately has obligations to pay for it to the financial agent (factor). The essence of this transaction is that the factor finances the supplier, who cedes to him the right of monetary claim against the buyer with a short period of return of funds. Banks or commercial firms that finance suppliers receive a commission from them for the service provided and the right to demand a debt from the buyer.

The service is similar to lending, but with certain features. In particular, payment can be deferred for a period from several days to six months. In Art. 824 of the Civil Code of the Russian Federation defines factoring as a financing agreement for the assignment of a monetary claim.

The following terms and definitions are used in factoring transactions:

1. Factor (intermediary, financial agent) is an organization that has a sufficient amount of financial resources to operate them. You do not need to obtain a license to provide factoring services. Any commercial organization can engage in them (Article 825 of the Civil Code). Factoring in Russia is mainly carried out by banks, their divisions, branches or special companies.
2. Lender is a company that supplies work, services or goods with deferred payment. He transfers the right to demand payment for the supply to the intermediary (factor).
3. Debtor (debtor or buyer) is an organization that receives a product (service) with payment deferred for an agreed period.
4. A factoring agreement is an agreement between three parties that governs the transaction. It defines the rights of the parties to the transaction, their duties and responsibilities.
5. Factoring operations are actions to provide financing services. These include analysis of the buyer’s solvency, transfer of invoices to the factor, and transfer of money to the supplier.
6. Factoring companies are legal entities that offer these services and receive a commission from the client (supplier). They must have sufficient resources to do this.
7. Factoring service - financial provision of a factor for the delivery of goods to the buyer, in particular, compensation of the seller’s financial costs in the amount of 70–90% of its cost. This gives him the opportunity to enter into other agreements on similar terms without withdrawing funds from circulation.

Installment card "Conscience"

Credit limit:

300,000 rub.

Grace period:

365 days

from 10%

from 18 to 70 years

Consideration:

Service:

Credit card Halva from Sovcombank

Credit limit:

350,000 rub.

Grace period:

1095 days

from 0%

from 25 to 75 years

Consideration:

Service:

Svoboda Bank Home Credit installment card

Credit limit:

300,000 rub.

Grace period:

365 days

from 0%

from 18 to 70 years

Consideration:

Service:

r

When necessary

Companies turn to the transaction factor financing service in emergency situations, but it is then that it is difficult to persuade him. The safety of working capital allows you to increase the company’s profit and immediately invest the money received for the goods in development, and not to pay off the debt that arose after delivery.

In the Russian Federation, the service is in demand in the following cases:

1. When a company plans development through cooperation with major partners, accepting their requirements. To attract a large partner, you should provide him with convenient payment terms.
2. Work with new promising enterprises, but unstable in terms of payment terms.
3. Transactions between SMEs and large, demanding corporations.
4. Transactions with companies with an extensive network. Typically, retail chains buy goods for sale, and the service allows suppliers to immediately receive funds and use them to purchase new batches of goods and develop business and production.

The service will not be provided:

• companies with a large number of customers and current debts;
• organizations producing specialized products;
• companies that present invoices for payment for supplies not immediately, but based on the results of a certain amount of work;
• organizations that engage subcontractors;
• organizations that sell products along with after-sales services.

It is not used:

• in settlements between the parent organization and its branches;
• in transactions of individuals and budgetary organizations.

Small Business Use

Most often, factoring is used by medium and small enterprises seeking to establish cooperation with large customers and develop their business. The reasons for using such a financing scheme by SMEs may be as follows:

1. The buyer is a large corporation with strict conditions for financing supplies with deferred payments, and the supplier is the SME sector.
2. SMEs in transactions with large buyers need working capital when loans are less profitable. When drawing up a factoring agreement, the bank focuses its attention to a greater extent on the recipient of the goods than on the supplier.
3. The supplier seeks to increase the recipient's loyalty by giving him the opportunity to pay for the delivered goods later.

How the deal is controlled

When financing a delivery, a commercial organization or bank constantly monitors the activities of the recipient. They analyze the transaction itself and the parties’ compliance with its terms, and also check the buyer for compliance with the requirements of the financial agent. If the factor sees in the buyer’s actions signs of impending bankruptcy or deliberate withdrawal of assets, he will terminate the contract and demand immediate repayment of the receivables.

The financial agent also monitors the supplier. If he or the recipient violates the terms of the contract, he has the right to present a claim to each of them.
The factor has entered into an agreement with the supplier, and the recipient under this agreement becomes his debtor.

Factoring or loan

Credit and factoring have much in common, but there are significant differences between them.

Credit
Short-term financing (from several days to six months)	Provided for a long period
Unsecured security	Given on surety or bail
The amount is determined by the transaction value of the supply agreement	The amount is predetermined
Funds are provided to replenish working capital	Issued for business development or other purposes
They will give you the amount (sometimes in parts) minus the commission	The entire amount will be released immediately
The set of documents is smaller (agreement, invoice, invoice). You can enter into an agreement for an indefinite period and receive funds under it using invoices and invoices.	To draw up a contract, you need to collect a package of documents. Repayment of the loan will not become the basis for obtaining a second one. A new contract is required.
The third party returns the debt	The debt is repaid by the person who took out the loan.

Kinds

Depending on the form of risk distribution, factoring can be with or without recourse.

With regression

The regression service is very popular. Its benefit is obvious to suppliers, since formally it is insurance in case the recipient, for any reason, refuses or delays payment. The recourse service provides that the factor has the right to return to the supplier all invoices unpaid by the buyer and demand the return of funds issued if the latter violates the terms of the contract and does not pay the invoices.

No recourse

The non-recourse service is used more often. In this version of the transaction, the factor (company or bank) assumes all risks for possible non-payments and covers all costs of the client, including legal debt collection. Possible risks of non-payment are immediately included in the price of the service, so non-recourse factoring is more expensive than recourse factoring.

Guarantees for buyers

With the “Guarantee for Buyers” service, the supplier can work with buyers, providing them with preferential payment terms, start collaborating with new partners, and enter new regions and markets. The guarantee operates as follows:

• The supplier coordinates buyer candidates with the factor and ships the goods to approved companies. Transfers data on deliveries to the factor;
• the factor issues a guarantee to the supplier for buyers in the amount of 90% of the supply volume;
• if the buyers do not fulfill their payment obligations for the goods received, the supplier sends the original documents to the factor to confirm the size of the requirements for them;
• the factor pays the guarantee funds within no more than four months.

Purchasing

It is called factoring for the buyer. The recipient, and not the supplier, turns to the bank for support with the goal of purchasing goods with deferred payment. The contract itself is the same: between the factor and the supplier, but the initiative comes from the buyer. He must interest the supplier in the proposed payment scheme. Typically, purchasing factoring is used in situations where the buyer knows in advance to whom he will sell the purchased goods. This occurs, for example, in chains of wholesale intermediaries. At the same time, the supplier has no risk, and he agrees to such terms of the transaction.

Purchasing factoring is used in the following cases:

• supply of exclusive goods (brands, expensive products) or seasonal products;
• the supplier is ready to credit the supply, but its terms are less favorable than the bank’s commission;
• the buyer works with many suppliers (for example, he is a supermarket that has many different products). The factor helps in this case to reduce the costs of organizing supplies.

International

Depending on the parties to the transaction, factoring can be international or domestic. Participants in international transactions are residents of different countries. International factoring agreements are concluded for a long period, and the supplier usually transfers to the factor the recipient's receivables in full or the debts of all its customers in one country.

Closed and open

Based on the form of informing the parties, factoring is divided into closed and open. In the case of an open service, the buyer knows that the supplier has concluded an agreement with the factor, and he makes payment to the factor. With the closed option, the recipient of the goods does not know that the supplier has entered into an agreement with the financial agent. He pays the supplier for the goods, and the supplier pays the factor himself.

What are the differences between factoring and assignment and forfaiting?

In financing supplies, the parties use lending, factoring, forfeiting and assignment. The differences between lending and factoring are described above.

Factoring is used when selling goods on deferred payment terms. The buyer pays part of the money (up to 90%) immediately, and transfers the rest later. The third party of the transaction is a factor. The contract is usually concluded for a period of no more than a year. If the transaction does not take place, the factor has the right to demand the return of his funds or use insurance (if available).

Forfaiting

In forfeiting, a third party immediately buys out the buyer's obligations to the seller. The supplier receives all the money at once, and the forfaiter can sell his claims to others. The forfaiting period can be up to several years. The forfaiter assumes all obligations and risks of the debtor under the transaction.

The differences between forfeiting and factoring are as follows:

• The validity period of forfeiting can be several years, and factoring does not exceed one year.
• A forfaiter, compared to a factor, assumes a greater volume of obligations and risks.
• Payment method. The factor first pays the supplier a part and then the remaining debt, and the forfaiter pays the entire amount in one payment.
• Forfaiting transactions can be resold, but factoring transactions cannot.

Cession

An assignment is a paid transfer of rights from one company to another. During the assignment, an agreement is drawn up for the assignment of the right to claim the return of the debt to the assignee from the assignor. To finance a transaction under an assignment agreement (debt purchase), documentary evidence of all initial obligations is required. Assignment provides companies with the opportunity to quickly receive funds and invest them in other transactions, get rid of hanging debts, develop a more successful business and increase its liquidity.

Evgeniy Malyar

# Factoring

All about factoring operations

Factoring is a financial service through which a supplier can receive instant payment for goods sold with deferred payment. This is facilitated by a third party - a factor (bank or financial company).

Article navigation

• The essence and goals of factoring
• How factoring works
• Legal justification for factoring activities
• Use of factoring in public procurement
• How does a factoring company work and how does it differ from a collection company?
• Types of factoring and their characteristics
• Specifics of closed type factoring
• Cost of factoring services
• Accounting and tax accounting of factoring
• Advantages and disadvantages of factoring

Factoring is a type of financial service that is becoming increasingly popular in the economy. In Russia, its volumes exceeded half a percent of gross domestic product (data for 2019), and continue to grow. Foreign experience shows that factoring payments can provide the turnover of a fifth of national GDP.

The essence and goals of factoring

Factoring is an effective tool for optimizing accounts receivable. If we convey the meaning of this statement in simple words, then such a transaction is beneficial to all parties involved in it:

• The buyer can receive goods with deferred payment;
• the seller receives instant payment for supplies;
• the factor's remuneration encourages his participation as a third party.

How factoring works

The essence of factoring is briefly described by the following diagram:

• The factor provides financing against the assignment of the monetary claim of the purchase and sale transaction.
• The buyer receives the goods from the seller. From this moment on, he owes the person who paid for the delivery.

So, factoring as a method of financing the activities of organizations is based on the assignment of the right to claim the buyer’s debt to the supplier in favor of the factor. In this regard, the following definition seems fair: factoring is a financial service through which a supplier can receive instant payment for goods sold with deferred payment. This is facilitated by a third party - a factor (bank or financial company).

The service is paid, since the form of financing involves the use of borrowed money. At the same time, the conditions under which factoring is provided are characterized by greater accessibility compared to a loan, and the documentation is simplified.

Participants in the factoring agreement

The following entities are involved in the factoring process:

• a seller interested in promptly receiving proceeds for goods sold or services provided (creditor);
• a buyer for whom factoring allows to increase the turnover of funds with minimal costs by providing a deferment (debtor);
• a factor providing factoring financing on a fee basis.

Most often, the debtor is informed that the right of claim has been transferred by the creditor. In other words, he knows that he needs to pay a third party (factor).

To make it easier to understand how factoring works, here is a simple figure illustrating the processes and their sequence:

Factoring scheme with explanation of actions:

1. The lender ships the goods.
2. The lender provides the factor with documents confirming the shipment.
3. The factor pays part (up to 90%) of the cost of the shipped goods.
4. The buyer makes a settlement with the factor.

Legal justification for factoring activities

The concept and essence of factoring in the Russian legal field are disclosed in the following legislative acts:

• Civil law (Civil Code of the Russian Federation) is a document that defines the official term “factoring”. The wording describes the transfer of funds for the goods (services) provided in exchange for the creditor’s monetary claim (Chapter 43 of the Civil Code of the Russian Federation).
• International UNIDROIT Convention. In almost any country, the standard law on factoring is based on the generally accepted document Convention on International Factoring (abbreviated as UNIDROIT), which takes into account its possible features to the greatest extent. In particular, a restriction has been established for individuals, since this financial instrument should not be applied to consumer goods.
• Tax legislation (Articles 265, 269 and 271 of the Tax Code of the Russian Federation).
• Federal legislation (395-1-FZ “On banks and banking activities” dated December 4, 1990).

Use of factoring in public procurement

The widespread introduction of factoring in the Russian economy also applies to the sphere of government procurement, which almost always involves long deferred payments. Enterprises that have won tenders and received lucrative orders and contracts are faced with the problem of a lack of working capital. Their deficit can be filled through lending, but this method is expensive and difficult to implement due to the complexity of documentation.

In practice, government agencies that act as customers refuse to recognize changes in the details of the payee. They justify this by the fact that according to 44-FZ it is impossible to change the terms of the contract during its execution.

The legal regulation of the assignment of claims in this case is indeed recognized by many experts as imperfect. Actual judicial practice, however, suggests that in the absence of a direct description of the mechanism, factoring of government procurement in itself is not prohibited. The contract remains in force, its parties (in particular, the performer or contractor) do not change. The assignment of a monetary claim was recognized as legal.

It will be easier to overcome possible difficulties in using factoring when paying for tender orders under 44-FZ if official permission from the Ministry of Finance of the Russian Federation for the assignment of debt under a specific agreement has been received in advance.

How does a factoring company work and how does it differ from a collection company?

Factoring functions can be performed by banks and specialized organizations. A narrow focus plays a positive role, expressed in the ability to provide additional services. In addition to their main activity, namely financing against assignment of claims, factoring firms:

• insure the risks of non-payment of debts;
• maintain accounting records for the client (most often the lender);
• collect accounts receivable;
• finance the supplier.

According to the law, a factoring company includes in its range of services at least two of the listed related services.

The financial result is expressed in payment for the service (in Russian realities - up to 20% of the settlement amount).

At its core, a factoring company is similar to a collection company. These types of enterprises buy out debts and then, in one way or another, exercise the right of claim in cash. The difference between them is manifested in the following characteristics:

• Amount of factoring portfolio*. Creditors can turn to debt collectors to collect relatively small debts.
• Reward amount. Banks and other financial organizations most often turn to collectors when the debt is actually classified as bad. The right of claim is sold very cheaply - for about a quarter of the nominal value.
• Methods. Factoring companies operate within the limits of the law. Unfortunately, there is a slightly different opinion about collectors.
• Debtor notification. As already noted, the debtor usually needs to be warned about the assignment of the right of claim during factoring. When contacting a debt collector, the creditor may not do this.

*Factoring portfolio is the total amount of outstanding payments transferred to the factor.

An example of a successful factoring company is the NFK company, which has been operating in the financial services market for more than a decade.

Types of factoring and their characteristics

Modern factoring is characterized by a variety of forms and types. For convenience, they are summarized in the table:

Criterion		Description
Moment of financing	Consensual	Pre-delivery factoring – the contract is concluded before the goods are transferred
	Real	The goods are transferred, the contract is concluded based on the invoice
Territorial	Interior	All parties to the factoring agreement act in a single national legal framework
	International	Import or export - depending on the direction of the commodity flow
Contract form	Convection	Also called open. The buyer is informed that a factor is involved in the transaction
	Confidential	The second name is “hidden”. The supplier receives working capital from the factor, and as money arrives from the debtor, he pays this amount. However, the buyer may not be privy to this scheme. Applies only to regressive transactions (see below)
Conditions of payment	Regressive	In case of non-payment of debt, the factor has the right to transfer the right of claim back to the creditor
	No recourse	Regardless of the debtor’s solvency, the right to claim remains with the factor
Scope of service	Full	The agreement provides for factoring services for all operations of the enterprise
	Partial	Factoring of individual transactions, each of which has its own contract

Security factoring, a financial instrument for providing a guarantee of fulfillment of obligations to a factor, deserves special consideration. Its use is regulated by paragraph 1 of Article 824 of the Civil Code of the Russian Federation.

The purpose of this measure is to protect the agency's interest in the event of late payment of goods to the supplier. The role of security property in this case is played by the right of monetary claim. Thus, the client (seller), having received payment for the goods he delivered, is guaranteed to pay the factor.

Also of interest is a variation such as a simple assignment of the right to claim debt. Factoring without financing involves no payment to the lender from the factor. After settlement, the supplier receives his funds, and the agent receives the agreed remuneration.

When factoring without financing, it is assumed that funds will flow smoothly to the lender’s account:

• within no more than five days after receipt of the goods, confirmed by issued invoices;
• after the debtor pays the debt to the factor's account.

Specifics of closed type factoring

Closed (also known as hidden or confidential) factoring was mentioned in the table above. Unlike the open (convection) type, the debtor in this case is not notified about the transfer of the right of claim to a third party (factor). It should be noted that the cost of confidential factoring is higher than that of convection factoring. Mutual settlements are made as follows:

• the goods are shipped to the debtor against invoices;
• the same primary accounting documents are used by the creditor to receive payment for the goods from the factor;
• the buyer pays the goods to the supplier;
• The supplier transfers the funds received to the factor.

The scheme is disclosed only in case of late payment of the debt. In this case, the right of claim passes to the factor.

Cost of factoring services

Factoring services are less common in Russia, in contrast to conventional lending. Today it is difficult for a potential client to figure out how much it costs and compare offers from different market operators: there is very little publicly available information. All that remains is to operate with logical constructs, summing up the components of the cost of the service. Factoring price includes:

1. Average interest rate in Russia for the use of borrowed funds. Credit is a paid type of service; it may differ in each region of Russia, but in general it is subject to average analysis.
2. Registration, processing and verification of documents. It is set by each institution at its own discretion.

In addition to these main components, factoring pricing is influenced by other factors:

• the accounting policy positioning adopted by the company or bank;
• turnover and financial condition of the applicant company;
• duration of deferment;
• the number of buyers who regularly work with this seller;
• price of a batch of goods;
• credit history and reputation of the client;
• level of competition.

The inaccessibility of information about the conditions of factoring is expressed in the desire of many potential users to obtain some kind of “regulations on the factoring department” of a particular bank, in which everything is supposedly spelled out. It is not known, however, whether such a document exists in nature, or whether the percentages are determined speculatively for each client individually.

As a result of the influence of various factors, the so-called effective rate is derived, which expresses the real percentage of remuneration for using factoring. In real life, it is slightly higher than the bank interest rate on business lending (the difference is up to 7%) in the case of a regressive agreement, when responsibility falls on the client. An increase in risks entails an increase in the price of the service.

Some banks working on factoring position this service among others, including those provided by factoring companies that are part of the financial groups headed by them. Among them:

• VTB Factoring - in the VTB group (detailed article);
• RB-Factoring - in the Rosbank group;
• GPB Factoring is part of the Gazprombank group.

Other banks provide factoring directly as part of their existing loan programs.

The general rule is that the efficiency of factoring for a bank should not be less than that adopted within the framework of general accounting policies. Otherwise, there is no point in diverting current assets to it.

Accounting and tax accounting of factoring

Factoring transactions are reflected in accounting by entries in the balance sheet.

Postings from the supplier:

Correspondence		Operation description
Dt	CT
62	90-1	Reflection of sales revenue (full amount)
90-3	68	Allocation of VAT on revenue
76-5	91-1	Income for the amount of rights assigned to the factor (“other income”)
91-2	62	Disposal of a monetary claim to a factor
51	76-5	Actual cash receipts from the factor
91-2	76-5	Accounting for remuneration due to a factor
19	76-5	Accounting for VAT on factor remuneration
68	19	Acceptance of VAT on factor remuneration for deduction
51	76-5	Receipt of the balance of the debt minus the factor's remuneration into the account

Factor postings:

Correspondence		Operation description
Dt	CT
58	76-5	The financial investment is accepted for accounting for the amount of the factoring agreement minus remuneration
76-5	51	Repayment of debt to a creditor
51	76-7	Receiving funds from the debtor for the full amount of goods
76-7	91-1	Accounting for income from disposal of investment
91-2	58	Write-off of investment value
91-2	68-4	Calculation of VAT on the difference between the amounts received from the debtor and the initial debt

Tax accounting of factoring operations has a number of features. As in other similar situations, there are two directions - profit and VAT. The factor's tax base is the amount of remuneration (the difference between receivables and cash claims). The formula for calculating income tax meets the general requirements of Chapter 25 of the Tax Code of the Russian Federation and depends on the region (to facilitate calculations, you can use the tax online calculator).

Discrepancies sometimes arise when determining the VAT tax base. They are due to the fact that previously the operators of factoring services were mostly banks, and their financial results were not subject to value added tax.

However, factoring is not among the operations exempt from VAT and listed in letter No. 03-2-06/1/1371/22 dated June 15, 2004. Thus, the factor is obliged to transfer this tax to the budget on a general basis.

The problem also arises when calculating the financial result of the seller who cedes the right of claim to the factor. Since most often the difference between the amount of financing received from the factor and the initial price of the product (service) is negative, factoring shows a formal loss in the cash flow statement.

Article 269 of the Tax Code of the Russian Federation establishes the maximum amount of interest costs recognized as allowable expenses on debt obligations: it is equal to one and a half refinancing rate of the Central Bank of the Russian Federation. An example of calculating the tax base for a typical factoring operation with a discount on the amount of the monetary requirement:

Enterprise A assigned the debt of company B with a deferment of 5 days to factoring company C in the amount of 4.5 million rubles. with a discount of 8%. This means that enterprise A incurs a loss in the amount of the discount:

Expenses to ensure the fulfillment of a debt obligation are recognized as justified in the amount of:

(13 – Central Bank interest rate)

The resulting difference between tax and accounting accounting in the amount of 360,000 – 96,164.38 = 263,835.62 rubles. is written off as the creditor's losses by posting Dt99 - Kt68.

Advantages and disadvantages of factoring

Factoring, as a way to compensate for a shortage of working capital, has a number of similarities with bank lending, although there are significant differences. Each financial service has its own pros and cons.

Factoring makes sense to use to finance trade operations (eliminate cash gaps), and bank credit - for investment and innovation, that is, investment in fixed assets. The factor, in addition to its main function, controls accounts receivable and assumes a significant part of the risk of non-payment.

Collateral for factoring, unlike a loan, is not required. The peculiarities of the legislation of the Russian Federation provide a number of tax advantages (the taxable profit base is reduced by the amount of factoring remuneration, and when VAT is calculated, goods are considered shipped but unpaid).

Other advantages of factoring relationships for the supplier include the following conditions:

• unlimited amount of financing;
• “elasticity” of financing, that is, its correlation with growth or decline in sales;
• compliance of payment for services with the term of real commodity lending;
• quick execution and payment for delivery - in some cases, the application can be submitted to the bank online.

Buyer Advantages:

• additional opportunity for commodity lending even if it is not offered by the supplier;
• possibility of extending the deferment;
• preferential prices and discounts corresponding to prepayment;

However, factoring objectively has disadvantages:

1. Price. The effective factoring rate is significantly higher than the bank's annual interest rate.
2. Incomplete funding amount. As a rule, the share of the paid part of the delivery does not exceed 90% (usually less).
3. Limiting the number of buyers per seller.

Another disadvantage is the selective availability of the service. Not all businesses can use factoring. In particular, firms are unlikely to be able to agree with the factor:

• working with many small debtors;
• engaged in construction or other activities related to subcontracting;
• selling products with subsequent service;
• issuing invoices for advance payments.

In addition, the factoring service, unlike a bank loan, is not available to individuals.

An important limiting condition is the systematic approach. One-time factoring transactions are extremely rare - financial companies prefer to work on a regular basis. The insufficient use of the factoring mechanism in Russia, in particular for online stores, is due to low awareness of managers and financiers about the possibilities of this service. To stay informed about them, it is recommended to view economic news more often.

Nowadays, it is impossible to imagine running a successful business without third-party financing, which most often comes in the form of lending (submit an online application) and, less often, factoring. The main task of factoring is that, unlike lending, this service involves financing current business, and not investment activity as a whole. Officially, factoring is usually understood as a certain set of financial services, the main purpose of which is the transfer or assignment of existing receivables to a particular company.

In this case, accounts receivable are the debts of one specific organization to another. Therefore, in simple terms, factoring is a unique type of lending against goods already received or services performed. That is, if a company sells its goods on a deferred basis, it does not have to wait until the deadline expires.

At the same time, this organization has the opportunity to receive its funds for the goods immediately after receiving them from a factoring agency - an intermediary (most often credit institutions play this role), and not from the buyer himself. Moreover, all existing debt is collected by a factor (a bank or a separate company) without the direct participation of the seller himself. So the factoring company assumes the responsibility to pay all the money for the goods instead of the buyer, and the businessman will receive real money at his disposal.

Based on all that has been said, it is easy to conclude that factoring provides an excellent opportunity for sellers to receive payment for their products or services even before they are directly sold to the end buyer.

Factoring parties are:

1. The supplier, who is the client of the factor, that is, the creditor.

2. Buyer, that is, debtor.

3. The factoring company itself is an intermediary, which is usually called a factor. This company takes over the receivables of a specific organization or buyer, while providing real money to the seller.

In simple terms, factoring helps the parties to the transaction to remain in their own interests with the lowest possible risks. That is, the supplier promptly receives his funds, the buyer sells the goods without problems, and the factor receives a certain commission from the transaction. Moreover, unlike lending, with factoring it is not at all necessary to provide collateral or guarantors. In addition, the terms of factoring are quite flexible, and the final interest rates are significantly lower than with other types of lending.

Modern types of factoring

Factoring is constantly being improved as the modern market develops. Adapting to modern trends, factoring has acquired more and more varieties and types that can offer their potential clients a huge number of innovative solutions.

So, modern factoring services offer the following types of relationships:

1. The classic type of factoring is with recourse. Used when selling goods with deferred payment. Most often, the factor buys no more than 90% of the receivables from its client. And as soon as the period expires, recourse arises and the factor receives the right to demand from the enterprise (client) the previously issued financing. For a factoring company, the risks are reduced to almost zero. It is especially convenient when partnering with regular customers.

2. Another type of factoring is without recourse. In simple words, the factor will have to independently demand the debt from the creditor or buyer if he does not pay all his bills on time. This service is subject to a high degree of possible risks, so it is significantly more expensive than with the right of recourse. The use of this type of factoring is especially important when working with new clients – creditors.

3. The internal type of factoring presupposes the presence of all parties to the transaction in one territory in one state.

4. International, that is, the appearance of factoring. It assumes that the parties to the transaction may be completely different entities from different countries. In this case, two factors take part in the transaction, one of which represents the supplier, and the other the buyer.

5. There is also an open type of factoring. It assumes that the creditor-buyer is aware that the agreement involves a factor who makes payments on his account. In this case, the debtor is notified of the redirection of payments to the factor's company, which is noted on the invoice.

6. The closed type of factoring is characterized by the fact that the debtor should not be notified of the factor’s participation in the transaction.

7. A reverse type of factoring is also provided. It is of particular importance for the creditor, that is, the buyer, since it makes it possible to significantly defer payments on credit debts or for goods already received. In this case, the second party to the agreement loses absolutely nothing.

8. There is another type of factoring, which is intended for works or services. In simple words, the significant difference between this type of factoring is that the factor is included in the agreement much later than in other types of factoring. This type is especially relevant when, due to certain force majeure circumstances, the company begins to urgently need third-party financing.

depends on the organization, but it seems like yes, they can use factoring! in any case, such cases are known to me!

#13

Tell me, can government organizations use factoring to participate in tenders?

#12

Thanks for the useful article. The concept of factoring is fully explained in simple words. I would like to know more about accounts receivable...

#11

Thank you for explaining the concept of factoring in simple terms. Now I finally understand what it is, and those who unsubscribed in the comments complemented the discrepancies... Thank you.

#10

Well, this is already in the category of phobias - you have some kind of intolerance to financial institutions. Everything is normal, and factoring is a useful measure and a loan is sometimes like manna from heaven. You need to take a simpler approach to such things, Vladislav.

#9

just to make money off the people. I can’t stand all these cans! I even feel bad when I have to go into a bank when necessary, it’s hard to breathe there...

#8

Who knows, factoring has various programs, it is different and you need to look at which option you are offered to cooperate with. If you're not careful, it may turn out that a lot of money comes out of your pocket.

#7

The debtor pays, of course, so how will you pay? Your party is the third, that is, you are not guilty. The debtor will pay everything!!

#6

And with factoring, who pays this share of the debt amount to the bank? Debtor or me?

#5

What don’t you understand, Marina? Factoring, simply put, is when any factoring company pays you money for being a buyer. Then she herself deals with the buyer in terms of refund. What do we get? But here's the thing - you immediately have the money, and the factoring company (this, by the way, can be any bank) has in its pocket a share of the amount owed by your debtor. Explained it as simply as possible. If you don’t already understand what we’re talking about, then you should think about whether you need it...

#4

But I still don’t understand what factoring is. In general, it is understandable, but somehow not completely. Simple words cannot explain such things in my opinion...

#3

Thanks for the educational material! Thanks to you, I finally understood the concept of factoring! Thank you again!))

#2

Lenders and bank employees deliberately came up with all sorts of complex concepts and terms. For example, take factoring, what kind of factoring is it, where does it come from? Where? For what? Not only that, there are also several species... oh-oh-oh friends...

#1

Thank you very much for your detailed answer on the topic of factoring. It is difficult to explain such concepts in simple words even to a person close to financial activities. You succeed, for which I am very grateful! All the best to you!

Among the huge number of credit 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 the debt on factoring financing is closed.

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 shipments 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 over 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: