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Factoring

What is it?

Factoring consists of the transfer to a financial organization of the credits generated by a company in the sale to third parties independently, in the form in which these are documented (letters, receipts, invoices...). The financial organization assumes ownership of the same and risk of non-payment of the buyers. The contracting company will also be able to anticipate collection of the transferred credits and control of collections.

Services offered by the financial organization Analysis of the solvency of the debtors, classifying them based on their solvency and assigning a line of risk for each of them.

Management of the portfolio of credits, issuing periodic information on each credit.

Management of collection of the transferred invoices, respecting the half-completed payments which the company has agreed with the buyer. In this sense, it is necessary to emphasize that the organization not only conducts the operations which are relative and aimed at the collection, but also the accounting, if necessary, the legal claim. The factoring contract also provides for the cover of risk of insolvency of the debtors up to 100% There is also the possibility of obtaining in advance the amount of the transferred credits. The company can, therefore, have the amount of the transferred invoices before the date of expiration. Nevertheless, the maximum limit is usually set between 80% and 90% of the total amount of the invoice, including VAT. The remaining 10% are allocated to the constitution of an account of guarantee designed to compensate possible overdraws on the part of the company.

Generally, the contract with the financial organization is annual, being renewed year to year once the situation of the company has been analyzed. Use of factoring.

Given the characteristics of factoring, it is a recommendable instrument for companies who: Have a very reduced structure which does not allow them to manage collection in an effective way. Belong to sectors in which payment conditions are key.

In their portfolio of clients, organizations that depend on public administration or companies of recognized prestige have a decisive importance. Sales to clients have a repetitive character. Credit lines have been exhausted, on the part of the financial sector, having arrived at the limit of risk determined by the bank.


Advantages Reduction of the costs of management and control of the clients, given that it is the financial organization which takes care of management of the collection.

Reduction of administrative costs. Allows to obtain financing of the transferred credits, improving the liquidity of the company.

Improves cash flow.

Increases the possibilities of financing or investment, since the company with factoring does not use credit policies. Allows to adjust the income statement since provisions for insolvency are not made. Tighter Treasury Budgets. Disadvantages

The initial cost is high, in comparison with other financial or collection instruments. The type of interest applied is, usually, higher than that of the commercial discount.

The financial organization selects the debtors that will make the factoring since they offer sufficient guarantees of collection and, therefore, can choose to not finance debtors for whom solvency is not guaranteed. Generally, payments of more than 180 days are excluded (normally they are from 90 to 120 days maximum)


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