Fine Perfection for the Proper Support Now Regarding the Business

The word “factoring” is familiar to most businessmen, but very few correctly represent the practical possibilities of this financial instrument. A survey conducted a few years ago by one of the factoring companies showed that 47% of entrepreneurs had never heard of factoring services, but at the same time, 75% of them were interested in sources of replenishment of their company’s working capital, and 66% would like to know about factoring more. The purpose of this article is to highlight the main advantages of factoring and the practical aspects of its application in modern realities.

What the Legislation Say?

In the legislation, factoring relationships were first regulated at the level of law only by part of the second new Civil Code of the Federation, which was put into effect on March 1, 1996.

Factoring is a kind of commission transaction combined with lending to the supplier’s working capital and is associated with the assignment of a factoring company of unpaid debt claims (invoices and bills) arising between counterparties in the process of selling goods and services. Now in the world practice, factoring has developed into a universal supplier service system, which includes accounting, information, sales, insurance, credit and legal services. The factoring company support is essential here.

Generalization for You

If we generalize and analyze the definitions of factoring, then it can be defined as a complex of commission and intermediary services for advancing and collecting receivables, credit risk insurance with subsequent information, accounting, consulting and legal support for the client, provided on a contractual basis and for a fixed fee.

Note! The sphere of activity of factoring traditionally does not include: debts of individuals, arrears arising from credit operations, and any debts due to the further performance of the contract by the supplier or its buyer.

As a rule, enterprises and organizations do not accept factoring services:

  • with a large number of debtors, the debt of each of which is expressed in a small amount;
  • engaged in speculative business;
  • producing non-standard or highly specialized products;
  • working with subcontractors (construction and other firms);
  • Realizing their products on the terms of after-sales service and others.

Factoring is the purchase by a bank or a specialized factoring company of the supplier’s cash requirements to the buyer and their collection for a certain fee. In other words, this is a certain type of trade and commission operations, combined with lending to the supplier’s working capital, associated with the collection of its receivables (unpaid invoices in the process of selling goods and services). That is why factoring operations are also called lending sales of the supplier or providing a factoring credit to the supplier.

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