Confirming. What it is, how it works, types and advantages.

Riskallay

31/3/2023

7 min

In the following, we will analyze the implications of Confirming, its different modalities and the benefits it provides to those who use it.

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This financial service is a practical and useful way to manage payments from a company to its suppliers, in addition to being a way for the former to make payments in advance, without having to wait for the expiration of the term determined in the voucher, and for the suppliers, a mechanism through which they can be paid for the product or service provided prior to the due date, normally with a discount in concept of commissions charged by the financial entity for the management.

What is confirming

Confirming is a financial tool used mainly by companies to manage payments to third parties -mainly suppliers- on an immediate basis, with the possibility for organizations to use this service up to the maturity date of their obligations to third parties.

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Confirming is an instrument that adds value not only to the company, but also to its customers and suppliers, since for the latter it represents a dynamic and diligent way of verifying invoices, and enables them to collect them before they are due, thus providing them not only with sufficient liquidity to continue with their activity, but also, in many cases, offering different options for managing the payment of amounts to customers.

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How it works

As Confirming is a financial product, it necessarily requires the participation of a banking entity, which manages the payments to the supplier to its customer and usually offers financing to both parties.

The supplier company, the beneficiary of the transaction, issues the invoice for the services rendered or, as the case may be, for the product delivered to the client company. Once the invoice is accepted by the latter, it is forwarded to the bank, which assumes responsibility for managing the transaction, offering the beneficiary an advance payment of the invoice, receiving a commission for the transaction, or receiving payment on the due date.

The bank receives a commission or fee from the client company for the debt management service.

In addition, you can also offer financing to your customer to pay invoices after the due date of the invoice, charging a fee or interest for this service.

This is why, through the figure of confirming, the customer and the beneficiary have the possibility of accessing a bank credit, either to advance the amount of an invoice to the supplier and the latter collects the invoice in advance or to finance a payment.

Parties involved in Confirming

As can be seen, confirming transactions necessarily involve three parties;

Financial entity, which is in charge of the management of payments of outstanding invoices and for whose work it charges a commission.
Client company, who entrusts the management to the financial entity and sends it the certified invoices.
Supplier company, who provides the service or delivers goods to the client company and from which the right to receive payment arises. In this instance, it is the supplier company that accesses the possibility of receiving the amount due in advance, prior notification and acceptance of the terms and conditions of the confirming contract.

What is the process like?

As mentioned in previous paragraphs, for confirming to take place, three parties must be involved: the financial institution, the client company and the supplier company.

The customer receives the provision of a service or a certain product on which he must pay a certain price in money. To make the payment in legal form, the supplier must previously issue a legal document whose function is to prove the sale or the service rendered and on which the legal taxes are levied.

Once the customer receives the invoice and in order for the confirming to take place, it delegates the management of the supplier's payment to the financial entity.

The financial entity must receive notification of the conformity of the voucher, as well as the due date. It is at this point that the entity offers the supplier the possibility of issuing a payment order to collect the amount prior to the stipulated due date with a discount, in which case the supplier may receive payment in cash, by check or transfer; or the creditor has the possibility of waiting until the agreed due date to receive the full payment.

In the event that the supplier agrees to advance payment of the amount owed by the customer, interest is agreed between the financial institution and the customer issuing the confirming.

In order for the confirming contract to be valid for the parties, it must be known by them and they must be notified in advance of the effects and the incidence on the payment that emerges from it. In this type of contract, the financial institution assumes the position of intermediary between a debtor and a creditor.

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Types of confirming

There are different classifications of Confirming, distinguishing between those that categorize them according to the subject that assumes the risk or according to the type of financing.

Depending on who assumes the risk

When we talk about confirming services, we must remember that there are different modalities depending on the subject that assumes the risk for the lack of payment and the form of payment that is defined.

Firstly, and taking into account the form of payment chosen by the customer, different variables may arise:

Standard confirmation: Through this method, the bank manages customer payments to suppliers, offering the option to advance the collection of outstanding invoices.

Instant Financing Payments: In this model, the customer and supplier agree on a payment date prior to the due date of the invoice and in return negotiate a discount for prompt payment of the invoice. In this confirmation option, the customer sends the bank an invoice to be paid, immediately crediting the supplier and thus financing the customer until the original due date of the invoice, the date on which the advance payment is received, plus commission and interest.

Financed Payment: In this case, the customer pays the invoice to his supplier on the due date and finances the payment for a certain period, after which the bank will credit the financing payment to his account together with the commission and interest.

Confirming can also be categorized according to who assumes the risk of non-payment:

Confirmation without recourse: In these cases, the supplier does not run any risk if the customer does not pay, since the risk of non-payment is assumed by the entity offering the confirming.
Confirming with recourse: The risk of non-payment is assumed by the supplier. The supplier can collect by confirmation.

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According to type of financing

Other types of recognition based on type of financing

Simple confirmation: the invoice is paid when it is due. The amount is not anticipated.
Confirmation of investment: payment is made before maturity. Customers benefit from economic discounts.
Confirmation of financing: Unlike the previous one, the customer's payment is made after the due date of the invoice. This accrues late payment interest that must be paid at the time of payment.

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Advantages of confirming

Confirming has a series of added values for both client companies and suppliers, since it not only provides them with financing, but also strengthens mutual commercial relations and improves negotiation conditions, transmitting greater confidence to suppliers.

Another benefit provided by confirming is that it reduces operating costs and administrative burden by eliminating the cost of issuing promissory notes or checks to customers.

Advantages as a payment system for suppliers

For the supplier, Confirming provides greater security in the payments it receives, as well as flexible invoice management and access to financing, without consuming its own line of credit, and most importantly, it provides the option of anticipating its invoice or waiting for the due date stipulated as the payment date.

Advantages as a payment system for companies

In particular, Confirming allows the issuing client to improve the commercial relationship with its suppliers, as well as order, accuracy and clarity in their payment management.

At the same time, it improves their negotiation capacity, which is outsourced through the work performed by the bank, as well as provides the possibility of accessing the financing means offered by the bank.

In this way, the supplier's reputation is enhanced by offering secure payment facilities backed by a third party, thus also avoiding the possibility of incidents that could eventually wear down the relationship with suppliers.

Difference between promissory note and confirming

The confirming generates the possibility of receiving money through payment of commission before the due date, while a promissory note provides security in the collection.

Confirming is a system that manages payments to suppliers, allowing them to pay invoices in advance on an established due date.

A promissory note is a security, of a nominative nature, which contains an unconditional and irrevocable promise of payment to a specific person. In this figure, on the one hand, the drawer, who assumes the quality of debtor and issuer of the instrument, and on the other hand, the borrower or beneficiary, who is the creditor of the payment order.

In the case of the promissory note, the place and date on which it was signed are essential and constitutive elements of the instrument. The existence of this type of defects invalidates it as such and consequently, invalidates it as an enforceable title.

Through this figure, the holder may demand payment of the check under the established conditions. And the figure of third parties is admitted in the capacity of guarantor.

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How to post a confirming. Example

A company agrees with its supplier to pay an invoice due in 90 days, but the supplier needs liquidity and therefore the company agrees to pay its supplier via confirming.

The supplier receives a communication from the bank notifying him of the possibility of discounting the invoice or waiting until it is due.

If he waits until maturity, the supplier does not bear any financial cost. On the other hand, if he agrees to receive payment in advance of the invoice, he is assured of receiving payment, although he will bear interest accrued by the financial institution and a commission for the opening of the confirming account.

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