Factoring Entities: Operations, Elements, Classes, and Benefits

Factoring entities are financial operations, with or without the right of recourse and its maturity. Commercial credits are generated against their clients (invoices, receipts, bills of exchange, etc.). The factoring entity is in charge of putting these credits into circulation, collecting them, accounting for them preferentially, and establishing the form and period of effect with client meetings, assuming the risk of the holder's insolvency.

Contract Elements

Personal Elements

1. Factoring entity: Analyzes the solvency of clients and, once accepted for the assignment, performs a function of 1% of the determined credit for each client. It assumes the risk of insolvency of the assigned credit and manages its collection in exchange for a commission paid by the holder. It respects the payment conditions agreed upon with the client. It can also advance up to 90% of the assigned bills.
2. Assignor or holder of the right: Obtains immediate payment of the amount owed by their clients by assigning these rights and paying the agreed amount to the factor, preventing the risk of default plus the rights over the assigned receivables. The holder is bound to the factor and can only deal with clients that allow it and have some assurance of solvency. They usually commit to working with a single factor, informing their clients that they must pay the factor going forward.
3. Clients or debtors: The assignor company is responsible for communicating the work of the factor to their clients. The assignor company provides goods and services to clients, who become debtors and must pay the factor going forward. The factor is in charge of managing the invoices and the different charges of the debtors of the assignor company, in addition to anticipating the final amount owed by these debtors. The factor analyzes the client portfolio of the assignor company and decides with whom it can negotiate.

Real Element

Factor rate: Usually ranges between 0.85% and 1% of the nominal amount of the invoice, established according to the type of contract.

Formal Elements

1. Existence of a provision share in factoring with recourse.
2. Commercial contract by a notary public.
3. Credit embodied in a bill or similar document.

Classes

By Risk Coverage

1. Without recourse: If a certain client of the holder defaults, the factor assumes the credit.
2. With recourse: The factor assumes the client's insolvency but manages its collection, increasing the chances of recovery. If it is unpaid at maturity, the client will return the advanced cost to the factor.

By Funding

1. With advance of credits: The holder can obtain funding and decide on the total receivables and the amount to be anticipated.
2. Without advance of credits: The receivables will not be paid at the time of their maturity because the client has no right to request advances.

By Place of Residence of Those Involved

1. National: Residing in the same country.
2. International: Assignor and debtor residing in different countries.

Advantages and Disadvantages of Factoring

Advantages

• Reduces administrative burdens.
• Provides accuracy in obtaining reports.
• Advances are allowed according to the needs of the company.
• It is considered as an advance payment of our loans, so it does not affect the credit capacity.
• Improves company liquidity.
• Ensures the collection from debtors.
• No debt, buy outright and without resources.
• Source of funding.
• Increased current assets.
• Consolidation of customers.

Disadvantages

• High cost.
• The factor may reject some of the client's documents.
• Excludes long-term operations.
• The client assigns the risk assessment of buyers to the factor.