Get Adobe Flash player

Chapter 9

FACTORING

 

by josavere

INTRODUCTION

The factoring it´s quite an old operation; it dates from the years of the colony, when based on the great risk of the commercial operation of bringing merchandise from Europe to America, the suppliers demanded a third party that guaranteed the negotiations.

As a matter of fact to the serious crisis that  the country lived in the decade on the 70´s, fed among other reasons, by the inadequate handling of two concepts very generalized.  One in the financial sector; where the most important to make a loan was the guarantee, and another one in the productive sector; “ according to which the cheapest capital is debt”, in this phrase we observe two big mistakes of basic finances, and that fertilized the land for the application or technique in Colombia.

In the meantime, the legislation it ignored this type of activity completely; the financial sector applying that of which what it is not prohibited it is allowed initiated operations. Like the problem of work capital he was so serious, it found great welcome and its voracity was so much that practically ended the mechanism when as soon as its practice in Colombia began, by the exaggerated interest rates which they received.

In certain cases that we will comment later, the operation can be very useful and it becomes an excellent alternative as much from a financial point of view like administrative.

 

 

1. DEFINITION

It consists of an administrative financial contract by which a financial organization (FACTOR) takes care of the credit functions and cash flow of a company (CLIENT) that requires the service by a special circumstance; it can be total or partial. The Factor, generally pays to the supplier of the client taking advantage of the discounts by soon payment and however it grants term to the buyer to cancel the invoices by means of the collection of a financing interest.

The client gives to the factor the invoices properly endorsed, previous authorization by the buyers, to discount them, in the operation they participate:

 

A. FACTOR: financial organizations, different from the credit establishments; authorized by the banking supervision, they exert the activity governing itself by decree 3039/89.

It is the society that buys by its account and risk, during a certain time or until a certain quantity, the totality or part of debts to collect of a natural or legal person committing it to cancel it at the time of its presentation or defeat.

 

B. CLIENT: company that contracts the services of the factor; it is the company that by special circumstances requires the service.

 

C. BUYER: person or indebted organization of the client or company who uses the factoring.


2. CLASSES OF FACTORING

A. DEFEAT: it is the most authentic formula of factoring. The FACTOR pays the invoices to his client in the date of defeat, independently of the whether they pay him or not.

In other words, assuming all the risks.  Some call it factoring without resource.

 

B. AT SIGHT: the factor generally anticipates part of the payment according to agreements (as far as advance payments and interest rate), and then it complements the value of the invoice to its defeat.

 

C. WITH AND WITHOUT NOTIFICATION: as the nomination indicates. In the first case, the client notifies his buyer that he must pay to the factor. Obviously, this one pays to the client. In the second, the client (salesman) makes the cashing and sends the collection to the factor. In both alternatives the factor assumes the risk of nonpayment or delay in the cancellation of the debt.

 

D. INTERNATIONAL: for an operation of this type two factors are required, one in each country. Each factor deals letters of credit of the outside work.

They can be of import or export and they have acquired much importance with the globalization of the economy.

 

 

3. PRACTICAL ASPECTS

The form of short term financing is actually a common problem in the enterprise.  The determination of what financing alternative to take? depends on the consideration of certain factors such as: the explicit costs, the enterprise reliability of the budgets, restrictions, convenience (services) and practices.

Generally at the beginning, we say that the factor simply comes to complicate the commercial activity. Why to involve a third party if the parts are negotiating in good terms? If the saler company has an adequate financial structure, it studies and it administers the credits well and it has his debts to collect as  the priority of source of  founds and if the buyer has healthy finances that allow him to fulfill strictly their payments there will be no logical reason.

The conditions are generally completely different, and for that reason the activity of factoring becomes an adequate mechanism of financing taking advantage of the debts to collect in addition to the services of its administration in the following cases:


A. WHEN THE RISK IS TOO HIGH: a certain operation can be too risky as it happens for example, in the sales of motorcycles.  The probability of accidents with personal injuries and deaths is very high. How to ask the family of the person for the money?, What processing is put under the collector? The factoring company specializes in the processing of this type of debts and takes the precautions and insurances needed.

The factoring companies are specialized   in studying credits and assuming risks. When fixing the interest rate you make the sum of the three components: cost of the money, value of the risk and expected yield. The salesman sacrifices a little of his utilities in exchange for receiving part or all the money corresponding to the invoice according to the agreements.

 

B. WHEN THE SALESMAN HAS A CHRONIC PROBLEM OF LIQUIDITY: for a company in these conditions, the factoring becomes an excellent mechanism to make the cycle of cash short and to diminish the risk that implies the unfulfilled payments by the clients, situation that would make a problem worse, that for many people that know about the subject it is the most serious thing in the world of businesses.

 

C. BECAUSE OF GEOGRAPHIC TYPE: in this special case, in regard to the risk that a geographic sector represents, the volume of operations, the costs of traveling, the difficulties to do it, etc., it is more convenient to contract the services of factoring with a company established in the area.


D. WHEN THE CUSTOMS AND CONDITIONS OF THE MARKET DEMAND IT: at the bottom from a financial point of view, the credit cards constitute a factoring operation.

As a result of the inflation, the money loses day every more buying power reason why great amount of cash for current transactions is required even at the risk of holdups, losses etc. in a society like that. By the previous considerations the use of credit cards, by its functionality and security that offers not withstanding that they are too expensive. It is the case of the restaurants, discos, bars, etc.

 

E. IN THE PURCHASE OF HOUSE: the corporations of saving and house (CAF) acts as a FACTOR company ; they pay to the constructors and they grant credit to the buyers. The operation is so complex that it requires specialization and a special regulation.


F. WHEN THE RELATIONSHIP WITH THE CLIENT IS NOT REPETITIVE: in products that the clients acquire very sporadically (those which are acquired themselves not very often in life).  For trade reasons, it turns out very advisable to establish permanent relations with the client and to maintain the contact to show new products to him, so that he can buy new products as he pays. In these cases, as far as possible, the factoring is avoided.  If it is strictly necessary, it must be done with the consent of the buyer and a previous notification.

The previous considerations serve as an element of judgment to study the alternative to use the FACTOR assuming costs that perfectly can be justified to obtain:

a. A shorter flow of cash and better assured.

b. To reduce the needs of capital of work, because of greater rotation

c. To reduce the risks of granting credits.

d. To avoid the expenses that a suitable handling of debts to collect (civil employees, stationery store, telephone, etc)

e. It facilitates the specialization of the parts, taking care of each company of which it knows, the company FACTOR specializes in studies of credit and cashing which allows him to reach high rates of efficiency.

Example: Manufactures sell their products with the following conditions:

a. Term: 30 days
b. Discount to pay at 15 days: 3%
c. Interests for delayed payment: 3.55%

It is easily understood that if the discount by payment at 15 days is if you pay immediately you would get a 6% discount graphically it would be:

The discount that can be obtained (%), is equivalent to the potential that can again company FACTOR, that obviously must be superior to its cost of capital  (changing value according to the conditions of the market) so that the operation becomes attractive.

With base in the previous analysis, different alternatives from negotiation can be discussed so that the operation is good for both parts.

 

Advertise Here