Today, many structures in the course of their work are faced with such a problem as delayed payments. At the same time, the conditions of the modern market indicate the need for free money in order to ensure a continuous production process. It is factoring (factoring operations) as a means of financing, when using which a banking institution acquires the requirements of a supplier to a buyer for a certain amount of remuneration, significantly reduces the need for free working capital. One way or another, this allows companies to gain competitiveness in the market, because sales volumes are growing tremendously.
Why factoring is needed
In the first chapter, consider the essence of factoring operations. Factoring should be understood as a kind of financial transactions, in which a banking institution or a specialized structure redeems monetary claims on the debtor. So, the bank itself collects debt obligations in favor of the seller, that is, the creditor, for a certain amountrewards.
There is a fundamental difference between collateral and factoring operations of banks. The latter should be considered as a transfer on the part of the lender directly of the right to demand the return of debt obligations from the borrower. The factor acquires this right. By the way, this word comes from the English factor - "commission agent, intermediary, agent." It is usually represented by a specialized or financial factoring structure. A commercial bank can also carry out factoring operations.
Varieties of service
Today in world practice there are the following types of factoring services:
- Acquisition by a factoring company or a commercial bank of the payment claims of the lender directly to the borrower.
- Provision of a set of services to the creditor by the factor, which, in addition to the assignment of the right to claim debt obligations, includes bookkeeping, analysis of current information regarding the financial situation of the debtor, advertising, transport, warehouse and legal services, as well as ensuring risk insurance credit plan.
Operators
You should know that three structures are involved in factoring services:
- Factoring (may also be a factoring department of a banking institution). This is a specialized company that receives invoices from customers (suppliers of goods,creditors).
- Client (supplier of marketable products, lender).
- An enterprise that is a borrower, in other words, a consumer company of a commercial product.
Reward factor
It is advisable to talk about the remuneration of a factoring organization. Due to the fact that the entire pool of risks associated with non-payment of invoices is assumed by a commercial bank or other factoring structure, it pays the client, as a rule, up to 80-90 percent of the total amount. The remaining debt obligations form a reserve, which is returned after the debtor-debtor pays the entire amount of the debt.
The risks of factoring operations are quite high. That is why the factor (a commercial bank or a specialized company) charges the client the following fees:
- Factoring commission. In the Russian Federation, its amount varies from 15 to 20 percent of the invoice amount, and abroad - from 1.5 to 3 percent. It is important to add that the size of the commission is inversely proportional to the amount of debt obligations (the amount is more - the percentage is less), the volume of intermediary activity that is required, as well as the level of risk.
- Loan interest. It is charged on the daily balance of the advance paid to the client against the invoices of the collected type. You should be aware that the collection of interest is carried out strictly from the moment the advance is issued until the moment the debt is fully repaid. The interest rate in this case, as a rule, exceeds the rate on short-term loans by 1.5-2.5% and the Central Bank of the Russian Federation - by 1-2%.
Types of factoring operations
Next, it is advisable to consider the types of operations related to factoring. So, today there are international and domestic, with and without the right of recourse, open and closed, as well as direct and indirect transactions. Actions can be considered internal if the factor, buyer and supplier are located in the same country. The operation of the international plan assumes that one of them is in another state at the time of the conclusion of the contract and the development of the factoring process.
Open and closed factoring
An operation is considered factoring if it includes a supplier, a buyer and a factor in its subjective composition. The conventional (open) type refers to the assignment by the supplier of documentation on the disposal of the marketable products of the factor company, subject to mandatory notification of the participation of the factoring structure in the payer's (debtor's) settlements. It is important to add that the notification is implemented by means of an entry on the invoice regarding the direction of the current payment to the factor (specialized company or banking institution).
In modern conditions, this can be a client service system, which consists of settlements with buyers and suppliers, accounting services, insurance loans, and so on. This system allows the client company to fully concentrate on the production process, as well as to minimize the costs associated withsale of a marketable product.
There are also closed factoring operations. Otherwise they are called confidential. Such financial services can be characterized by the fact that the debtor is not notified about bringing the debt of the factoring company to collection. It should be added that today the tariff for closed factoring services is slightly higher than the fee for the corresponding open plan services.
Recourse and non-recourse factoring
As it turned out, factoring operations can be with or without the right of recourse. The factor has the right to demand from the supplier (creditor) the reimbursement of previously transferred amounts of funds in the event that the payer (borrower) refuses to fulfill its obligations in terms of repaying the loan or paying for the shipped marketable products. As a result, the recipient (creditor), after signing the recourse factoring agreement, does not cease to bear the credit risks associated with the realized debt claims.
It should be said that the non-recourse factoring agreement is the exception rather than the rule today. A non-recourse factoring operation says that the factoring company, in the event that the payer (borrower) fails to fulfill its financial obligations within a specified period, must pay all costs related to debt collection in favor of the supplier (creditor). As a rule, this time period varies from 30 to 90 days. Thus, in the case of an agreement on factoring services without the right of recourse, the supplier (creditor) does nothas credit risks associated with the factoring receivables of the buyer (borrower) sold by him.
Accounting for factoring operations
As it turned out, factoring operations can be both open and closed. Depending on this factor, as a rule, there are some nuances in the process of reflecting such transactions in accounting. Financial factoring in the variety that is implemented in foreign countries is based primarily on commercial lending in the form of a deferred payment from 1 to 3 months for the delivered commodity product or in the form of using this form of relations for loans and settlements between the buyer and the seller, the debtor and creditor as an open account.
Giving a loan to the buyer by the supplier in accordance with the rules of an open account and making payments in this form are associated with the risk of paying for marketable products not on time or not paying at all, because upon receipt of the documentation, the buyer does not endow the supplier with any debt obligations. This risk is assumed by the banking institution or factoring company, being the owner of claims that are not paid. After receiving payment from the factoring structure within the previously determined timeframes, minus the corresponding remuneration, the supplier can begin the formation of plans related to settlements already with their creditors.
Factoring in the global market
Today, factoring operations have received a fairly widedistribution in the world market. Their volume is estimated at about 260-270 billion dollars a year. The reason for this is not only the advantages that this company provides to partners participating in it, but also the approval in Ottawa in 1988 of the Convention regarding international financial representation. This document was prepared by the International Institute for the Unification of Private Law, it is convenient in that it can resolve all factoring issues and nuances of all participants at once.
Factoring in Russia
It should be said that today Russia has not yet acceded to the Convention, which we talked about in the previous chapter. Nevertheless, a number of basic factoring provisions are resolved in the spirit of this Convention in the Civil Code of the Russian Federation. Thus, in accordance with civil law, as a financial intermediary, agreements on financing against the assignment of funds can be concluded by banking institutions, other credit-type organizations, as well as other commercial structures that have a license (special permit) to carry out the relevant activities.
Factoring agreement
A factoring service agreement is a special case of cession, that is, the transfer of creditor rights to another person, a financial intermediary. In the case of the transfer of rights under a standard, general civil cession, as a rule, the creditor is only responsible for the invalidity of the assigned monetary claim, but not for its implementation. In the relationship between a factoring company and a client, the question of whowill bear the risks related to the possible non-payment of invoices by the debtor, is decided in the factoring agreement and is of fundamental importance for the client.
