What is a factoring contract and what elements should I pay attention to?Johannes Röll 03 / April / 22 Visitors: 300
Factoring is a financial service that few people have heard of until recently, but now it is gaining popularity among entrepreneurs every year. This is one of the most effective ways to maintain the financial liquidity of the company and ensure its free access to capital. The factoring contract is most often concluded with a financial institution and has the character of an unnamed contract.
Factoring services consist in the purchase by a bank, another financial institution or an entrepreneur specialized in this business of outstanding financial obligations. What does this mean in practice? Unpaid invoices are transferred to the person who took over the accounts receivable from us, he pays us the amount indicated in the invoice and receives the amount due directly from our contractor.
What does the factoring agreement consist of?
The factoring agreement is a bilateral agreement, but it is not fully regulated by law and is largely based on the principle of freedom of contract. His pages are most often:
a factor is usually a bank or financial institution that provides factoring services, taking over the accounts receivable of an entrepreneur. The factor pays the factorer the amount specified in the invoice, minus the commission;
a factorer is an entrepreneur who sells his accounts receivable.
In the concluded factoring agreement, there is another person who, however, is not a party to the agreement. It is the factoring debtor, that is, the counterparty, who must be notified of the change of the creditor.
However, it is worth noting that the form and terms of the factoring agreement depend on the type of services. Most often we are dealing with full or incomplete factoring. The first concerns a situation where the risk of insolvency of the debtor is entirely on the side of the factor. The second case concerns an agreement in which non-payment of receivables affects only the factorer.
What is the subject of the contract?
Simultaneously with the signing of the factoring agreement, the entrepreneur submits a claim to the factoring. The factor undertakes to control the repayment of accounts receivable under purchase and sale or delivery contracts concluded by the factorer. Simply put, the factor pays the factor pays a certain part of the cost of accepted bills, the maturity of which has not yet expired.
Full factoring, that is, factoring without recourse, consists in assuming all responsibility related to the possible insolvency of the counterparty. It is the factor factor that is responsible for collecting overdue payments, and the entrepreneur is not obliged to return previously paid funds. The contractor transfers the amount due directly to the factor's account. This form of service is recommended for companies that are dynamically developing and establishing relationships with new business partners, and also have many uncertain or foreign counterparties.
Partial factoring or factoring with regression is that the entrepreneur is still responsible for paying the debtor's receivables, so the risk of his insolvency falls on the factorer and he must return the received advance to the factor. This type of contract involves a greater risk for the entrepreneur, but it turns out to be beneficial when he enters into business cooperation with many counterparties at the same time, or when for other reasons he does not want the counterparties to find out that the company uses external financing.
How and with whom to conclude a factoring agreement?
Factoring for companies is a service that banks and financial institutions are increasingly offering, so it's worth learning a little more about the process of concluding a contract. Most often we deal with two types of factoring contracts. The first of them has the form of an ad hoc transaction, i.e. a one-time execution of a service. Many more people decide to sign a fixed-term contract, under which the factor undertakes to purchase accounts receivable with a pre-established limit applicable during the term of the contract.
It should be remembered that factoring contracts in many cases are drawn up by financial institutions on the basis of standards adopted by them and signed in the presence of both parties to the contract, i.e. the factor and the factorer. However, its conclusion does not require too many formalities – most institutions do not check creditworthiness, and invoices issued to counterparties become the basis.
After signing the factoring agreement, the entrepreneur receives an offer from the factor. From it we will find out how much the service costs and when to pay for it. Some companies pay the entire amount, while others reduce the commission agreed earlier in the terms of the contract. After accepting the offer, the funds are transferred to the company's account, which usually takes from several hours to several days.
How much does factoring cost?
The costs associated with factoring services, as in the case of a product such as a loan for companies, most often depend on several factors, including a daily commission on a paid invoice, a fixed subscription fee, a monthly fee for the factoring limit, a factor commission or interest on an advance payment charged until the invoice is paid. Therefore, the question arises, what aspects should I pay attention to when choosing a factoring offer? It is worth analyzing the type of factoring that will be most profitable for us. The currency matters, as well as the financing period and, therefore, the amount of commission charged by the factor. It is also worth checking the total cost of the service.
Factoring is an effective way to improve a company's financial liquidity, increase flexibility, and maintain independence from invoice payment deadlines, which are usually up to 30 days from the date of invoicing. Using factoring services allows you to have money in your account much faster, so it is easier to plan the company's future activities, its modernization or increase in human resources. It is also an interesting alternative to financial products such as corporate loans, since creditworthiness is not always required.
Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer