Types of factoring

Liquidity is the fuel that companies need to function on a day-to-day basis. One option that can help them with the injection they require is factoring: it is a short-term financing mechanism whereby a financial institution advances collections to a business.

Through the factoring mechanism, a company assigns a credit (an invoice or collection right) to a financial entity (factor) in exchange for payment of that amount of money. But the value that the entity can bring to the company goes beyond the purely financial, since factoring incorporates additional services such as collection management or commercial advice.

The main benefit that the company obtains by contracting factoring is to transform its credit sales into cash transactions, i.e., to get cash in hand. This, by extension, improves the financing capacity of the business.

Factoring manages payments, not collections. This financial service allows customers to manage payments to their suppliers and, for the latter, the possibility of collecting invoices before the due date.

What percentage does factoring charge?

Factoring fees

Financial institutions such as Drip Capital charge a factoring fee between 0.5-1% on the face value of the invoice.

What is a factoring bond?

It is a contract whereby a company transfers the invoices it has issued and in return immediately obtains the money.

What is a factoring operation?

In essence, by virtue of a contract with an entity authorized to perform factoring operations, the company receives in advance the money from its sale in exchange for assuming a percentage for discounting said invoices. …

How factoring works

What do we talk about when we talk about factoring or confirming? Generally speaking, they are new ways of obtaining financing beyond the classic loans. They are alternatives for contracting financing services from banks or similar entities.

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Factoring is, above all, a financial operation aimed at obtaining credit by a company. As such, there is contact between two people, either individuals or legal entities, who usually have the following profile:

This is the great differential of factoring as such. Because the transaction involves a series of invoices that have not yet been collected, which are delivered by the borrower to the lender as a form of repayment of the amount given on credit. In other words, instead of monetary units, future collection rights are delivered.

Now that we have defined what factoring is and the parties involved, it is now convenient to talk about the objects of the contract, i.e. what each of the contracting parties delivers. Thus, we can speak of:

What is factoring and an example?

We remind you that factoring is a financing tool used by companies to obtain liquidity through cash advances on their customers’ accounts receivable, thus avoiding waiting for payment for more than 30 days.

How does factoring work in Chile?

Factoring is a process that allows companies to advance the collection mechanism, thus constituting a short-term financing possibility that guarantees immediate liquidity. … Through this method, a company delivers an invoice receivable to a financial institution.

Who pays for factoring?

The bank or financial entity grants the credit to its client and it is the client who orders the factoring to be carried out. Another alternative is that the company (supplier) accesses an entity specialized in this process, presents the invoice and the name of its client.

Financial factoring

It is requested to record the transaction from the point of view of the assignor (the “shiny” company) assuming that the risks and benefits inherent to the ownership of the assigned receivables have been transferred (non-recourse factoring). VAT at 18%.

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The statement indicates that this is a non-recourse factoring in which the risks and benefits inherent to the ownership of the assigned receivables have been transferred, so the assignor will have to derecognize the customer balance from the assets. The entry is:

It is requested to record the transaction from the point of view of the assignor (“shiny” company) assuming that the risks and benefits inherent to the ownership of the assigned receivables have not been transferred (Factoring with recourse). VAT at 18%.

The statement indicates that it is a factoring with recourse in which the risks and benefits inherent to the ownership of the assigned receivables have not been transferred, so that the customer balance does not have to be written off from the assets. The entries are as follows:

What is confirming example?

How does confirming work? Practical example: The company agrees with its supplier to pay an invoice due in 100 days, but the supplier needs liquidity and therefore the company agrees to pay its supplier via confirming. … If the supplier waits until the invoice is due, he will not bear any financial cost.

How is factoring used?

The company receives the advance on the accounts receivable, which is generally between 80% and 90% of the total. The factoring company collects the invoices from the customer. Once the customer pays, the outstanding balance of the invoice, less interest and commissions, is transferred to the company.

How much does factoring charge in Chile?

The factoring company, in turn, charges 30,000 for the transaction, interest for 26,000, plus a withholding tax of 10% of the total.

Factoring in chile

(1) by its holder to a specialized firm. In other words, it can be defined in general terms as a financial operation consisting of the assignment to a factor (factoring company) of commercial credits against its customers by a company, in exchange for an agreed amount (2) .

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The main advantage for the holder of the right is that it immediately collects the amount owed to it, although it has to bear the cost of the operation. For companies with a large volume of collections, this means more efficient cash management and savings in administrative costs.

In this sense, to avoid the risk on the receivables, many companies transfer the “trade receivables” account to a factor. As a result of the transfer of the “customer” account, the company is in the hands of the factor, in that it can only deal with the customers it allows, and who have, of course, a certain solvency or guarantee of payment of their debts. In short, factoring relieves the businessman of the task of studying his clients and the risk of non-payment; but it is also necessary to take into account the higher cost of insuring this risk, so that the businessman must take these details into account when deciding whether or not to carry out this type of operation.

By Rachel Robison

Rachel Robison is a blogger who collects information on court filings and notices.