Factoring. What it is and differences with confirming

Both Factoring and Reverse Factoring or Confirming are financing options available to companies for invoice management, whether they are invoices receivable or payable. 

Poor management of collections and payments can cause the company to experience solvency problems and a negative perception on the part of customers and suppliers of the company's real ability to pay and its commercial management.

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What is factoring

Factoring (also called "factoring") is a type of non-formal and atypical contract, which may take the form of a contract of adhesion or with predefined clauses of a consensual, bilateral, onerous and successive execution nature. 

Through it, a credit assignment is made by those companies that have amounts receivable, authorizing financial entities to grant advances on amounts from sales, acquire them at risk and then manage their collection.

The entity that provides the financing service using factoring actively participates in the role of cooperation and collaboration with the assignor company, since it carries out a selection process of potential customers to whom the service can be offered, previously evaluating the credit risks of these debtors.

On the other hand, it allows the company to increase its liquid resources without having to wait for the certain date set for debt collection, which represents an increase in its balance sheet, an increase in current assets available and an improvement in its income statement ratios.

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Related content:

• Financial Risks: What are they, types and how to manage them?
• Balance sheet of accounts. What it is and how to do it
• Cash Flow. What it is, types and how to calculate it

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How factoring works

First, we must determine the parties involved in this contractual figure, which are three, namely:

1. Assignor: which will be the companies that generate the commercial credits and sign the factoring contract.
2. Debtor: are the individuals or legal entities that must comply with the obligation to pay sums of money, particularly commercial credits.
3. Factoring-factoring entity: these are the financial entities that are in charge of carrying out the factoring operation.

Factoring involves the company assigning all or part of its short-term trade receivables, transferring the invoices issued and obtaining the money automatically from the financial institution, deducting a percentage corresponding to the commission and interest charges. 

In this way, the assignor transfers the collection of existing receivables and invoices in its favor to the factor, obtaining in exchange in advance the money for such operations, with a discount for interest and commissions in favor of the factor.

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Benefits of factoring

When the parties decide to carry out a factoring contract, the assigning company privileges the elimination of the risk of reflecting balances with lack of immediate liquidity, since through this contract, the factor advances the cash flow necessary for the assigned credit. 

Another of the advantages provided by this figure is that it is a useful instrument for the responsible and projected management of the way in which the transferor company manages its finances and resources in the medium and long term. This makes it possible that, in the event of possible business opportunities, the company has sufficient solvency to be able to consider these possibilities.

Types of factoring

There are different types of factoring, however, we will refer to those that are most common within the commercial line of business.

Factoring according to the entity offering it

Bank Factoring

Also called "Traditional Factoring", it is the one that is strictly requested to banking entities.

Non-Bank Factoring

Here, the management for the advance payment of invoices is carried out by private investors, through crowd factoring or invoice crowd lending platforms. 

Factoring by risk

Recourse factoring

In these cases, the companies are relieved of the risk of non-payment by the debtors.

Non-recourse factoring

Contrary to recourse factoring, through this type of factoring, the companies assume the total risk to the factor for uncollectible debtors.

Factoring by location

National

Domestic factoring takes place in those cases where the factoring company and the debtor are, jurisdictionally speaking, in the same country.

International

Unlike domestic factoring, in these cases the parties, either the factoring company or the debtor, are based in different countries.

Import

In this variant, the assignor is foreign and contracts the service with a factor located in the same jurisdiction as its debtors.

Export

This version is the inverse of the previous case, whereby the transferor sells products abroad and the debtor or customer is located abroad. In this case, the factor is located in the country of the transferor. Thus, the latter receives immediate payment for its sales without the need to wait for its customer to receive the goods or make the payment.

Factoring based on advance invoices

Global Assignment

In the case of global factoring, the parties agree that all customer invoices may be assigned and it is the assignor who determines the order in which payments are to be advanced.

Punctual Assignment

Under the timely assignment, only the invoices on which collections are to be advanced are presented without previously establishing a preference among them.

Factoring according to debtors

Public Sector

This is a way of classifying factoring according to the type of person who must fulfill the payment obligation. In this case, the debtors of the invoices are from the public sector.

Private Sector

In contrast to the previous case, in private sector factoring, the debtors are from the corporate sector.

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Factoring by number of contracts

Shared

In the case of shared factoring, several parties are involved in the factoring process and jointly offer the service to the same assignor. 

Single Contract

In this case, the assignor enters into the factoring contract with a single entity that performs all future collection of receivables.

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Factoring based on notification to debtors

No Notification

It was used in the U.S. and Europe to keep the existence of factoring secret because the existence of invoice factoring was perceived by the public and suppliers as a symptom of financial weakness of the trader or company being factored, which consequently had a negative impact on the sales of the company whose receivables were assigned. 

However, through this figure the factor and the factored party may agree not to notify the assignment, with the factor assuming the consequent risk in the event of insolvency or bankruptcy. 

With Notification

In these cases, the debtor is notified that his invoices have been anticipated, and therefore, once the due date occurs, the amount must be paid to the factor.

Agency

In these cases, the assignor is appointed as the factor's collection agent, who is responsible for the collection of the assigned receivables and then remits the funds to the factoring entity at the time the payments are made.

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Differences between factoring and confirming

Although the instruments may seem similar, the reality is that while factoring is a tool used to collect debts from client companies, Confirming or Reverse Factoring, on the other hand, is a service contracted for the payment of debts to suppliers.

In both cases, a financial institution is involved; however, in the case of factoring, the purpose of factoring is to obtain liquid resources for the company, while in the case of confirming, the purpose is to obtain liquidity from the suppliers.

The confirming is a mechanism that not only satisfies suppliers by providing them with a way to collect their invoices in advance, but also indirectly improves the company's bargaining power with its suppliers, improving the company's image with third parties and helping to reduce liabilities on the company's balance sheet. 

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