Companies draw funds for their day-to-day operations from various sources: one of them is of course trade receivables, i.e. payments made by their customers for products or services delivered. It happens, however, that the time that elapses from issuing an invoice to receiving the amount due from the contractor may be so long that it may threaten the financial liquidity of the company. This undesirable situation can be prevented by using factoring services.

Factoring is increasingly used by companies that sell goods or services with deferred payment. This means that the company makes the delivery and then a certain period of time (e.g. 30 days) passes, after which the contractor makes the payment. From the regulatory point of view, income is already realised in this period, which is defined in the contract, and tax obligations are incurred by the supplier of goods and services, even though the supplier has still not formally received the money in his account. The company may also have to pay its business partners (suppliers, partners) during this time. If he is not able to pay them from his own resources, he may apply to the bank for a working capital loan, which, however, involves many requirements and thus takes up valuable time.

How does factoring work?

- The factoring activity is based on the purchase of undetermined and undisputed receivables of companies, receivables due from customers of their goods or services by the factor institution and the financing of current activities of customers.

- The most common forms of factoring are non-recourse and recourse factoring.

In the simplest terms, factoring is the purchase and management of undetermined receivables by a factor. The Factor (a manufacturing, trading or service company) provides invoices and receipts to the Factor and the Factor makes an advance payment, which is normally 80-90% of the gross invoice amount. The remainder goes to the enterprise when its business partner pays for goods or services. The conclusion of a factoring agreement between the company and the factoring institution means that the contracting parties of the above mentioned factor will transfer the receivables to the bank account of the factor (they must be informed about this change). In the event of non-payment for receivables purchased by the factor by the contractor, the factor shall be entitled to payment until the lawsuit is instituted. The two most common forms of factoring agreements are partial (with recourse) and full (without recourse) factoring. In the first case, the factor provides debt financing, settlement and collection services, but does not assume the risk of the debtor's solvency. If the delay in payment of the invoice by the counterparty exceeds the deadline agreed with the invoice, the factor is obliged to return to the factoring institution the advance payment made on the invoice (which may take various forms, e.g. deduction of the amount from the next advance payment). In full factoring (without recourse), the factor takes over the risk of solvency of debtors, which allows the entrepreneur to protect himself against the lack of solvency of the counterparty. The factor in both cases charges costs for factoring services, i.e. commission, which is a percentage of the assigned receivable and interest.

Advantages of factoring

- Using factoring means, among other things, acceleration of payments for invoices, and thus the possibility of planning company's expenses more in advance.

Thanks to factoring, the company receives funds faster for invoices issued with deferred payment terms. Thus, of these amounts, he can pay his business partners on time. These transactions are carried out with the funds coming from the advance payment from the factor. The company does not have to apply for loans (which it may not obtain if the creditworthiness is too low), nor does it have to violate the accumulated capital. This is particularly important for small and medium-sized enterprises, as it allows them to maintain liquidity while increasing their competitiveness. Factoring is a flexible form of financing - a company can plan expenditures and investments in advance without fear that its contractors will be late in paying invoices, even in periods when the financial situation of the company is weaker. This service is also a form of disciplining customers to meet their obligations on time. At the same time, it allows for savings of funds allocated for maintaining a large accounting and debt collection department within the company, responsible for monitoring the repayment of amounts shown for products delivered or services rendered.