What are the functions of factoring?
In the world of financial services, there are three main functions that a factoring service can perform:
- funding function;
- administrative function;
- warranty function.
Factoring does not always perform all of these functions at the same time – some of them are limited to a specific type of factoring. In order not to have difficulty distinguishing and applying them, let’s discuss them one by one.
Financial function of factoring
Entities using the factoring service transfer their receivables to a factor – a company that provides factoring services. This solution allows almost immediate access to funds that were previously “frozen” – for example, due to a long invoice payment deadline.
The financing function in factoring is carried out through a quick transfer of funds (it is common practice to transfer funds to the factor after just a few hours), which makes factoring an attractive alternative to a bank loan, subject to numerous requirements and restrictions in the implementation of the disbursement of funds.
To sum up: the sale of receivables is instantaneous, and the cost incurred by the entrepreneur using the service is small compared to the benefits he can obtain.
EXAMPLE
Mr. Maciej, who runs a business, cooperates with company “X” and regularly issues invoices to this company in the amount of PLN 15,000. The payment term on his invoices is always 60 days. Mr. Maciej, in order to carry out further orders, cannot wait so long for cash, he needs the funds now. Company “X” is one of Mr. Maciej’s regular contractors, and as a result, he decides on permanent factoring. Mr. Maciej, immediately after issuing an invoice to company “X” (and to the other regular contractors submitted for factoring), can submit it for financing and get the frozen funds faster.
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Administrative function of factoring
Small, micro and one-person enterprises often do not have administrative departments, and their owners handle the collection of receivables themselves. In a situation where a company regularly does business with several customers, such a system is likely to work smoothly without the need for changes.
However, if there are more customers, or if new customers appear frequently, the prolonged waiting time for repayment of receivables can rightly worry the entrepreneur. In such a situation, the use of factoring (and accompanying additional services) will allow not only to secure funds, but also to ensure the handling of receivables, including contacting debtors and assessing their solvency.
Guarantee function of factoring
The guarantee, security or del credere function occurs only when the factor assumes the risk of the debtor’s insolvency.
Full assumption of solvency risk occurs only in full factoring (proper factoring) and is usually preceded by a thorough assessment of the debtor’s finances.
It is also possible to assume the risk of insolvency up to a certain amount, determined at the stage of concluding the factoring agreement. If the amount owed by the debtor exceeds the amount mentioned above, the responsibility for repayment reverts to the factor. Such factoring is called mixed factoring, as it combines features of full and partial factoring.
A multitude of possibilities
While it is indisputable that the receivables financing function is the essence of factoring, the other options should not be underestimated.
Other functions of factoring are the handling of receivables by the factor, which can take a fair amount of responsibility off the shoulders of the entrepreneur, and the function of the del credere, allowing you to virtually forget about your receivables – assumption of the full risk of insolvency by the factoring company involves additional costs, of course, but in return it offers an immediate solution to the problem, independent of what happens later.
