3 factoring myths - learn more!
Factoring is one of the forms of financing the company's operations. Its purpose is to provide the company with financial liquidity. It consists in the fact that an external company collects debts for its client from its contractors, both in domestic and foreign transactions. Factoring has been popular on global markets for many years, has been present in Poland for about 10 years and is dynamically developing. Factoring is often confused with debt collection. It is also sometimes considered a new form of credit. Many myths have arisen about him. Referring to the statement by Grzegorz Pardela from Pragma Faktoring SA, we will dispel 3 myths about factoring.
Myth number 1: Factoring is credit
More than a half of small and medium-sized enterprises in Poland have almost no chance of obtaining a working capital loan (according to Eurostat data). A working capital loan is a short-term injection of cash to cover the costs of the company's day-to-day operations. Working capital loans, similarly to factoring, are to ensure the company's financial liquidity. Banks may refuse to grant this form of assistance due to bad credit history or lack of collateral. Contrary to banks, factoring companies also provide support to newly established companies and those that do not have sufficient security to get a loan. In factoring, the financing of receivables is a security.
Factors do not use the bank's creditworthiness assessment model. They focus on a specific transaction. The factor may even be behind the offices with payments. Then he may consider using reverse factoring. It consists in the fact that the factoring company can offer financing with a repayment schedule or make payments on behalf of the client to his recipients. Such financing differs significantly from a loan, it is much more flexible.
We can certainly debunk myth number one. Factoring is not a form of credit. Factoring includes many services, e.g. verification of recipients in databases informing about payment discipline, verification of documentation, management of receivables portfolios.
Myth number 2: Factoring is debt collection
Debt collection consists in the recovery of receivables whose payment deadline has expired. The factor monitors the timeliness of non-overdue payments, and in the absence of timely payments, reminds you of the need to make them. If the payer still refuses to pay the amount due, the factor may decide to refer the amount due for recovery. The factoring company does not interfere with the business model and relations between the client and his contractors. All activities are consulted with the client.
Factoring is especially useful for invoices with deferred payment terms. Under the agreement, the client may transfer the receivables to a factoring company (both the factoring agreement and the debt collection agreement are based on the structure of the transfer of receivables). In this way, it will immediately get 70 to 95 percent. their values. The factor will earn by collecting the entire amount due from the payer. It is the factoring company that the payers will settle accounts with, not the entrepreneur. The payer, known as the factoring debtor, will be informed about the change of the creditor. His business relationship with the client will not change.
Myth number 3: Factoring is a type of accounting
Another myth is that factoring is an invoice accounting program. Factoring undoubtedly improves the company's financial liquidity. It allows companies with smaller working capital resources to cooperate with a recipient who requires a long payment term because they do not have to wait for the payment to be made.
One of the additional services offered by factoring companies is settlement with the recipient. Factoring companies have systems for monitoring and handling receivables, thanks to which they can relieve the accounting staff of factoring companies, but the essence of factoring is to improve the company's financial liquidity and minimize the risk of transactions, not accounting.