What is the difference between invoice financing and factoring?

Example of factoring

Factoring can be confused with a credit granted by a bank or a regular loan. In reality, the operation involves your company financing itself with an asset, the accounts receivable, and not incurring debt.

In turn, the factoring company charges a commission in exchange for delivering the money from the invoice to be paid in advance. Therefore, it is important to review the needs of your business and your economic possibilities to opt for this type of financing.

Having a well-defined and structured collection process within a company is vital to keep finances and operations in general running smoothly. With this in mind, in this article we define 5 management strategies

What is factoring?

Factoring is a way for companies to advance the collection mechanism. It is a contract by which a person or company assigns the credits derived from its commercial activity to another, which is in charge of managing its collection. It does not have a specific regulation in our Law.

What is the difference between confirming and factoring?

Factoring is a service contracted to collect promissory notes, while confirming is a service contracted to pay debts to suppliers.

What is factoring and how does it work?

Factoring is a financing alternative that allows your company to advance the partial or total collection of your accounts receivable through specialized entities. This is done through the assignment of your accounts receivable (invoices and bills), thus converting them into immediate liquidity.

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Difference between factoring and confirming

This is the case of factoring and confirming, two financial services offered by specialized entities and which are, to a certain extent, two sides of the same coin. Let’s look at the main characteristics of each of these financial services, before focusing on the main differences.

Factoring – or advance payment of invoices – consists of assigning a short-term commercial credit reflected in a commercial invoice to a specialized entity, which advances the amount of the sale to the assignor and then takes care of collecting the stipulated money from the debtor on the agreed date.

With factoring, the company converts forward invoices issued to customers into cash immediately, without having to wait for the expected date of collection. In addition, in the case of non-recourse factoring, the service comes with a guarantee against non-payment. In other words, if the invoice is not paid, it is the financial institution that assumes the default and is responsible for trying to recover the credit.

What is a payment confirming?

Confirming is a system designed to provide a set of administrative and financial services in the management of payments to third parties contracted by the Buyer/Payor company, allowing Suppliers to choose the payment of the invoice in advance of its due date by the Bank.

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.

What is a factoring company?

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

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Types of factoring

Factoring is a financing alternative that allows your company to advance the partial or total collection of your accounts receivable through specialized entities. This is done through the assignment of your accounts receivable (invoices and bills), thus converting them into immediate liquidity.

The negotiable invoice is a security similar to a check or promissory note that was created by Law No. 29623. This security may be represented physically or through its book entry in an ICLV. It is originated in the purchase – sale of goods or rendering of services, oriented to those companies that sell on credit in which large companies pay them at 90 or 120 days.

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 accepts to pay its supplier via confirming. … If the supplier waits until the invoice is due, he will not bear any financial cost.

What is confirming and examples?

Confirming is a financial service that allows a company to manage its payments to its suppliers. The financial institution that offers Confirming advances the amount of the invoice in question to the supplier, who will be able to collect this invoice in advance by financing it, before its due date.

Who assumes the risk of non-payment in confirming?

In non-recourse confirming, the risk of non-payment is borne by the financing entity. When the debt matures, the financing entity cannot collect the amount of the debt from its client, it cannot require them to return the money and the financing entity assumes the risk of non-payment.

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Factoring companies

Long payment terms make it difficult for many companies to meet their obligations. Invoice advance and factoring are some of the tools available to companies to obtain liquidity and solve their working capital problems.

Factoring, unlike advance payment of invoices, is a contract in which a company assigns the receivables arising from its commercial activity to another (financing company) to manage their collection and make the advance payment of the invoices. Depending on the type of contract, the company (assignor) may be obliged to finance all the invoices or only part of them, and the assignee will be responsible for collecting them. There is also a distinction between an individual assignment (invoice to invoice) or a generic assignment (in which all the trade receivables of an assignor-debtor relationship are assigned).

Within factoring, a distinction can be made between factoring with recourse and factoring without recourse. Non-recourse factoring implies that the risk of non-payment of the debtors is borne by the financial institution, while factoring with recourse implies that the assignor also assumes the risk of non-payment by its customer.