What is factoring and who can benefit from it?
Factoring is one of the modern forms of financing the company's day-to-day operations. It helps enterprises because, firstly, it allows them to improve their financial liquidity, and secondly, it facilitates the process of collecting debts from their debtors.
Factoring - the most important information
The factoring agreement is not governed by the provisions of the Civil Code - it is an unnamed agreement. It combines elements of other contracts to create its own integral whole. It is concluded on the basis of the principle of freedom of contract functioning in the Polish legal system.
In Poland, the factoring service is offered mainly by banks. It consists in the purchase by the factor (bank or other financial institution) of non-overdue financial receivables that arose in domestic trade between the factorer, i.e. the supplier of goods or services, and their recipient. After the use of factoring tools, the recipient of the goods or services becomes the factor's debtor and it is him who directly repays its obligations resulting from the previously concluded contract.
Factoring as a method of recovering receivables
Factoring is intended for enterprises whose business consists in selling goods and services with a deferred payment term of, for example, 90 days. However, it may turn out that during this period, the seller will need funds for which, according to the previously issued invoice, he must wait. In this situation, he may turn to a factoring company and take advantage of its offer. After the conclusion of the relevant contract, the company provides the factor with a troublesome invoice and receives a predetermined payment for it, which is a certain percentage of the invoice amount. The remaining part of the receivables goes to the factor immediately after the full amount is paid. Faktor charges a commission for its services, which is deducted depending on the contract, from the first or second part of the payment.
Factoring is a useful solution that has many advantages. This does not mean, however, that the factoring service does not have any negative effects.
Factoring is an alternative to a bank loan. Factoring does not reduce a company's creditworthiness and, as a result, does not limit future potential investments. In addition, it does not matter for a factoring company whether there is any creditworthiness of the company that wants to use its services. What matters is the fulfillment of the condition for issuing a troublesome invoice with a deferred payment date. Additionally, these types of services do not require any security, for example in the form of a mortgage. Finally, it is worth noting that factoring has a positive effect on the company's liquidity, which is of great importance when it is applying for additional external financing, for example in the form of an investment loan.
Factoring and additional costs
Before deciding to use the services of a factoring company, it is worth taking into account the fact that the commission of the intermediary, i.e. the factor, may constitute a significant amount. However, if you have the prospect of losing the entire amount of a troublesome invoice, it may be worth considering. On the other hand, giving up the money that is the factor's commission reduces the company's profit. As a result, it may turn out that in companies that impose lower margins, it will be necessary to increase the prices of services and goods sold, and this may have a negative impact on the company's competitiveness.