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Finance. It is essential to consider financing alternatives for your business, especially if your company is required to issue invoices and these are not paid immediately. That's why in today's post, we'll explain what Factoring consists of, one of the most used financing resources in Chile.
The main characteristic that unites the different types of Factoring is that it is a financing alternative that benefits, preferably, small and medium-sized companies since they provide immediate liquidity to the company that hires them. Basically, it is a contract through which a company contracting the Factoring service or client assigns invoices that exist in their favor and the future credit collection system that are included in them, and in exchange, it immediately obtains payment for these credits from the Factoring company that receives the invoice, which we will call factor, minus a discount corresponding to the profit generated by the Factoring company when collecting 100% of the invoice from the debtor. Then, the factor will be responsible for collecting the document from the debtor at the time of the deadline established in the invoice.
There are two basic models of Factoring: First, there is non-recourse Factoring, which is where the factor receives the invoice, provides immediate liquidity by paying the value of the invoice to the customer and takes charge of the collection to the debtor but is fully responsible for the damages caused in the event that the debtor fails to comply with his obligation to pay the bill. Second, there is recourse factoring, which is basically what was mentioned above, but with the difference that in this model it is the customer who must assume responsibility and financial damages in the face of the debtor's failure to pay the bill. These are the two most used models in the national and international Factoring system.
To better understand this, let's give a small example: A company dedicated to the automotive industry sells its auto parts to an automotive company and for this reason issues an invoice worth $50,000,000 pesos. The invoice issued contains a period of 90 days for the car company to pay it, but it is not convenient for the spare parts manufacturer, since it needs to have the money immediately because it must pay for other outstanding obligations. This is why they use a Factoring or Factoring company to transfer their invoices in exchange for their value plus a discount, which will allow the factoring company to make a profit when it comes to collecting the bill from the debtor for 100% of the value of the invoice.
The advantages of Factoring are clear. One of the most notable is the reduction in workload for the contracting company, since it outsources the management of invoice collection, giving space to focus on increasing its production levels or delivering a better service to customers. Along with the above, the contracting company will see its financial income increased since it will receive the value of the invoices immediately without having to wait for any period of time. A second advantage is that no debts are generated for the contracting company, since it is simply a transfer of rights to the Factoring company with respect to the collection of the invoice in question.
Finally, even if the advantages are visible, it is not always convenient to hold a Factoring service, since they generally mean a high financial cost for the hiring company or client, since Factoring companies usually charge high commissions for each operation based on credit. Secondly, it may not be convenient because if a Factoring service is contracted with recourse, it means a great risk for the contracting company, since it will assume the loss resulting from the debtor's default on the payment of the invoice, and in the end it will have lost more money than the amount generated based on the invoice. If you still have questions or suggestions, do not hesitate to contact us by leaving a comment, or sending an email to contacto@nss.cl]] >