Factoring is a universal tool that will be successful both in the times of economic welfare and in the ones, when the entire market slows down. In the times of the boom, it will support the entrepreneur in case of a need for more working capital due to increasing sales; on the other hand, during the slump, it will help to eliminate the negative effects of the accruing payment jams and will allow for improvement of liquidity through exchange of receivables into cash.
In the period of economic slowdown, banking institutions are not willing to grant financing. Factoring companies have a bit different approach to this issue. What does this difference result from? What is crucial for the bank is the creditworthiness of the potential client. On the other hand, the factoring service – contrary to the bank credit – focuses mainly on assessment of the trade risk between the client and its customer. Factoring does not mean only an inflow of cash to the company bank account. It also offers a lot of added services which are particularly valuable for the entrepreneurs in the times of a worse market trend.
The basic benefit is of course improvement of financial liquidity and simultaneous improvement of the structure of the balance sheet. It in turn entails the possibility to negotiate better credit terms or higher limits with the suppliers. In the crisis times, the preventive actions available within factoring, such as for example verification of solvency of the customers, become more important. Thanks to them, the entrepreneur will avoid the sale of the goods or service to a company with poor financial condition and thus – future problems with collectibility of this receivable.
Legal assessment of the concluded agreements and contracts will be useful both in the times of the boom and in the ones of the slump. After analysis of the documents, the client will find out about the consequences of all unfavourable provisions. It will allow for performance of the transaction with elimination of the impact of the potential disputable situations and will allow for avoidance of such provisions in the future. Within the factoring service, also the option of transaction insurance, i.e. takeover of the risk of insolvency of the customer up to the amount of the limit granted by the insurer that the factoring company cooperates with, is possible. This option is particularly useful in the time, when the number of the declared bankruptcies increases.
When the economic situation is stable, the companies rather do not look for savings but for the possibilities to improve their functioning in such a way as to enhance the comfort of their work. Then, factoring will have the advantage consisting in the possibility of the entrepreneur to be relieved from the need to ask for their money all the time, since it is the factoring company that is responsible for monitoring of ongoing payments. Another convenient option is the possibility to order the debt collection actions to the Factor. Apart from that, in the times of the boom the suppliers are more eager to apply discounts and thanks to the means obtained within factoring, the entrepreneur will be able to agree on more favourable terms & conditions for cash purchases from their suppliers – so factoring can simply pay off. Moreover, the sales department of the client obtains a better position for discussions with their customers, since thanks to the means obtained within factoring, it may offer long payment terms with no deterioration of the financial liquidity of the company and with acquisition of new areas on the market, in which the customers have always expected deferred payment terms.
Published on: 28 April 2014