Theoretically, a big and well-paid order is a fulfilment of dreams of any company. In practice, a happy entrepreneur must answer itself several important questions in order to avoid being poured with icy rain instead of the rain of money.
- Is the company technically prepared to realise the order? May the company afford the costs of all materials, sub-assemblies, half-finished products and making payments toward VAT?
- What will happen if the ordering party does not make its payment on time?
The first question should be considered even before the offer is submitted. However, it is often very difficult to estimate correctly the amount of work or costs of half-finished products, which may vary in time. The issue of VAT payment is also very problematic. A company is forced to pay VAT regardless of the fact whether the customer has made payment or not. A nonsense, but it may lead to the situation, in which a profitable contract may become a burden.
Here, an order-related factoring may prove useful, which makes it possible to finance a single transaction. Financing is initiated at the very beginning of the production process, i.e. at the moment of order placement or contract conclusion.
It must also be noted that this service is more available for small and medium enterprises than a working capital facility. The basis to grant factoring is an assessment of the customer’s solvency, not the solvency of the company itself.
As such, it is the perfect solution for smaller companies executing orders for big organisations.
Published on: 14 November 2016