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Today, within our section of Concepts of Economy we are going to deal with factoring; a financing vehicle in companies that is not excessively exploited by SMEs but by large companies. In the companies, the control of the circulated, the treasury and the accounts to pay and to receive are one of the nuclei of any activity.

Within the tools of the control of accounts receivable, factoring is one of the ways to advance the collection mechanism in the company without having to opt for formulas such as the commercial discount. Factoring as such is a financial service that has several important features; both in the credit advance mechanism and in the hypothetical consequences of default that can be generated in this product. For the Commission advances are designed specifically for real estate companies this is important.

Factoring: definition and operation

Factoring is an operation of assignment of credit receivable by the company in favor of a financial institution normally. The credits that are part of assignment are instrumented in current operations of the company, normally of the flow of sale of its products or services to third parties. In the case of term sales, a credit is generated in favor of the company supported by the commercial operation that is likely to be transferred to a third party.

Factoring as such presents a series of services, which may be the following:

Assume the credit risk, which is called factoring without recourse. In this case, if the transferred (company that has to pay the transferor) incurs non-payment, the risk of the operation is assumed by the financial institution.

Assume exchange risk, if the invoice is in foreign currency

Carry out collection management and not take over the risk of default; which is known as factoring with recourse. In this case, if the transferor fails to pay the transaction, the transferor is the one who runs the equity hole.

Make the effective collection of the credit

The usual operation of factoring contemplates the partial or total advance of the credit assigned to the financial institution and except for debtors of first quality and with very good credit rating, the financial entities carry out factoring with recourse, factoring that does not include the risk of non-payment in the entity financial

The cost of factoring

The process we have described of factoring has a significant financial cost , given that financial institutions usually apply a commission for each operation; commission that can reach 3% of the credit rating assigned, usually apply an interest rate for the advance of the credits and can pass on the cost of other associated services, such as an exchange rate insurance or a previous commercial report of the company with which we are going to work.

For the purposes of the SME, factoring is usually accepted only by financial institutions in cases where these small companies work with large companies, for example with one of the listed companies and very long payment periods have been formalized.

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