Factoring has become an attractive alternative to bank loans
In times of crisis, business owners have a growing problem with recovering their debts from contractors on time. So they are looking for effective solutions that will help them get paid for the goods they sell. Factoring companies that offer comprehensive services increasingly appreciated by entrepreneurs meet their needs.
Factoring is a service consisting of the purchase of unpaid receivables from customers (factors) due to them from contractors for various supplies and services rendered to them. In simple language: an entrepreneur who has problems with recovering his money submits the appropriate document to the factor.
If all formalities are completed, the factor pays the entrepreneur an advance payment, most often it is the percentage of outstanding invoices specified in the contract. The remaining amount is settled when the factoring company receives payment from the recipient.
Factoring allows you to recover your receivables
If this does not happen on time, the factor launches various disciplinary actions to motivate customers who are in arrears with payments. However, everything depends on the type of contract and the form of factoring.
Full factoring consists in taking overall risk related to the debtor’s solvency by the factor. In this case, the factory receives the entire amount due and the factoring company claims itself. In the absence of such an obligation, there is talk of incomplete factoring.
It can be said that the factoring service is very similar to classic credit. An entrepreneur needs a cash injection for already performed services or supplies. However, in this case, apart from financing, the entrepreneur receives much more. Usually, factoring companies offer comprehensive activities, which include the management of these receivables and additional services such as a collection of receivables, payment monitoring, conducting settlements, as well as assistance in collecting overdue payments.
An entrepreneur could get any of these services from the bank’s offer, but he would have to sign many different contracts . This would, in fact, expose him to higher operating costs (because of every service costs), and it would be very labor-intensive due to the multitude of formalities.
Bank loan hardly available for entrepreneurs
That is why business owners highly value comprehensive factoring services. During the crisis, it is very important to maintain financial liquidity, and the outstanding balance effectively hampers it.
In addition, the slowdown in the economy and low-interest rates meant that banks tightened their lending policy, which is reluctant to grant funding to entrepreneurs.
That is why companies are looking for the best solutions for themselves. An additional advantage is the greater motivation to pay off debt when a factoring company asks for it. Such a client is aware that a factor has more opportunities to collect debt than an entrepreneur.