Suppliers are ready to make great concessions to their customers in order to win contracts. However, they are still able to base their cooperation on a clear, well-signed contract, which will enable them to avoid many problems. There are, however, still may issues that may lead the company to lose its financial liquidity.
Not mentioning formal issues, the necessity to accept credits for transactions given for longer and longer period becomes a big risk. What shall we do when it is necessary to fix the maturity date convenient for our customer (i.e. a long one) in order to maintain a contract which is favourable for us in financial terms? The formalities may be completely buttoned up (as was described in the article titled – “How should a good trade contract be drawn up?“), but still a long period of waiting for money may prove killing for the company.
It is exactly why factoring was invented (more about factoring here). Cooperation with the factor may solve many problems. Customers are able to make their payments on deadline, which is convenient for them and fixed in the contract, a supplier gets money practically immediately after contract signing.
Factoring is a perfect tool for smaller companies cooperating with big entities. Such customers like, e.g. big trade networks, developers or public administration are solvent, but – for various reasons – they usually demand trade credits to be granted for long periods. The vast majority of factoring contracts involve the so-called recourse factoring, i.e. the case when a factoring company does not assume the risk of customer’s insolvency.
Despite visible advantages of factoring, the risk for an entrepreneur of being burdened with the debt still exists. That is why debt collection may prove a helpful protecting tool. Insofar factoring is an answer to long payment periods, debt collection constitutes the tool to solve problems involving delays in payment. When protecting our company’s financial liquidity, we must think of all eventualities. Pragmatism requires us to use many tools – depending on actual circumstances.
Published on: 9 November 2016