Factoring, known in Italian as “cessione del credito” or “invoice advance,” is a financial instrument that allows companies to improve their liquidity by selling trade receivables to a specialized financial institution.
The factoring process involves three main parts:
- Transferor: The company that sells its receivables.
- Debtor: The customer of the transferring company, who has to pay the invoices.
- Factor: The financial institution that purchases loans.
The assignor sells its invoices to the factor, which advances a significant percentage of their value (generally between 80 percent and 90 percent).
The factor then handles the management and collection of receivables.
Advantages of Factoring
Improving Liquidity:
Companies can quickly access funds by converting receivables to cash and improving cash flow.
Credit Risk Reduction:
The factor assumes the risk of debtors defaulting, offering a form of credit insurance.
Optimizing Credit Management:
The company can delegate credit management and collection activities to the factor, focusing on the core business.
Types of Factoring
Non-recourse:
The factor fully assumes the risk of the debtor’s default.
With Recourse:
The transferor retains liability in the event of non-payment by the debtor.
Maturity Factoring:
The factor pays the assignor when invoices are due, regardless of the debtor’s payment.
Factoring Costs
The main costs associated with factoring include:
- Factoring fees: A percentage of the value of invoices assigned.
- Interest: Applied on the amount advanced.
- Investigation fees: Costs for analyzing and evaluating the loan portfolio.
Impact on the Budget
Factoring can positively influence several financial indicators:
- Reduced collection time: Improves the working capital cycle.
- Improved liquidity ratios: Increases the company’s ability to meet short-term commitments.
- Optimization of financial structure: Can reduce dependence on traditional bank credit.
Final Considerations
Factoring is a flexible and strategic financial solution for companies seeking to optimize working capital management.
However, it is crucial to carefully evaluate costs and benefits, considering specific business needs and alternatives available in the market.
A thorough analysis can help determine whether factoring is the most suitable tool for improving the liquidity and financial management of the enterprise.