Factoring is useful for any company which wishes to entrust to a specialist the management and control of its credit portfolio.

The need for factoring arises when there is an imbalance between the company's commercial credit policy requirements (relating to payment terms and conditions for customers acquiring their products/services; funds to be used to financially "sustain" the payment extensions granted; forms of regulation; control of the relationship; procedures regarding collections and debt recovery) and the resources which the company can autonomously have available.

Potential demand therefore comes from companies which show a "need for factoring" connected to its management function (administration, control, collection, insurance of credits) and its financial function (customer status assessment, integration of traditional credit lines thanks to advance un-blocking of credits).

On the Italian market factoring currently covers a wide range of commodity sectors and companies of all sizes.

According to a survey regarding requests for factoring by Italian companies, "young" companies, companies in rapid expansion, companies whose activity is mainly seasonal, and more in general where the management of liquid assets constitutes a strategic aspect of the business are those most likely to make use of factoring.

Factoring allows for a long-standing relationship with the company such that it is able to flank it in respect of the administrative, organisational and financial functions relating to credit management which arise during the course of business.

Factoring is typically oriented towards a long-standing relationship with the client, rather than based on a specific transaction such that it is able to flank the company in respect of the administrative, organisational and financial functions relating to credit management.

The typical sort of transactions for factoring operators (factoring companies and banks) belong to relationships of a commercial nature and are accompanied by the transfer of company credits. Factoring may also concern future credits, in relation to contracts yet to be stipulated, credits relating to financial operations, credits of a fiscal nature.

Factoring may also concern the credits of national suppliers (exporters) with foreign buyers and the credits of foreign suppliers with national debtors (importers).

The need for recovery of outstanding debts is the last of the reasons motivating recourse to factoring by Italian companies.

Speed and security in the allocation of funds, help with credit management, guarantee of the company's credits subject to collection, are the principal advantages of factoring appreciated by customers.

These are the three main elements of satisfaction indicated by companies in the survey about requests for factoring. And these elements indicate that in the majority of cases there is a more than adequate level of satisfaction.

From a financial point of view, in particular, always according to the companies, factoring allows them to satisfy funding requirements of a temporary nature, to optimise collections planning, and to facilitate turnover growth.

Factoring is however a service with a high level of personalisation, in respect of the characteristics and needs of the customer.

Factoring is still a tool which is little known by the companies, even though they use it quite frequently.

In reality companies do not know very much about the characteristics of factoring. This is due to an insufficient financial culture and also inadequate information given by banks and factoring companies.

Factoring is also now a consolidated tool within the economic and financial system. It has been available in Italy for over 30 years and involves tens of thousands of businesses.

In general, the companies with a greater consolidated experience of recourse to factoring appreciate its advantages and specificity more and, studies show, use it "correctly" and this is reflected also in the methods used to judge such advantages which are basically more correct and more favourable. Companies which know and/or use factoring less (or badly) are often victims of clichès about the subject, they express summary judgements which are not always fitting to the real situation of the factoring market, and they rarely take advantage of the opportunities which the use of factoring can propose.

A large part of user-companies, who took part in the survey about the demand for factoring in Italy, thinks it is useful to continue the factoring relationship, and also that this tool is destined to develop within the respective business sectors.

Factoring can permit savings in costs which the company sustains for the management of supply credit, thanks to the outsourcing of the relative assessment, administration and control operations.

Factoring can permit savings in costs which the company sustains for the management of supply credit.

Flanking a company in the management of commercial credits signifies managing, according to outsourcing logic, a function which requires a high level of specialisation: the company does not therefore have the onus of the relative structure costs, which are sustained by the factor (factoring company or bank) more economically, thanks to economies of scale which characterise, for example, the collection of information on ceded debtors, and its specialist skills in credit management.

Factoring also permits the transformation of fixed costs connected to direct credit management into variable costs (the factoring commission).

Certainly the possibility of arriving at the substitution of traditional credit management costs with the cost of factoring, by outsourcing the activities of credit administration and control and entrusting these to the factoring, depends on a recourse to factoring over time and it will therefore be more likely when the company makes long-standing and extensive use of the factoring.

Factoring is a more complex service than bank financing and also gives greater added value. In order to assess the benefits a correct term of comparison is the average cost of financings and the cost of internal management of commercial credit.

Factoring is not directly comparable to traditional financial tools, like for example bank lending, in relation to the presence of the element of management service.

The recourse to factoring in fact implies sustaining two types of costs:

• the financial cost (interest), relating to the financing and implicit in the payment of the credit before expiry; the interest rates charged by the factor are in line with market rates, taking into account customer characteristics and operational risk.
• the administrative cost (commission), relating to the management and possibility of guaranteed credit subject to collection; the commission depends on the type of services offered and the characteristics (due dates, amounts etc.) of the assigned credits.

The advantages of using factoring therefore depend on a comparison between tradition administrative and financial charges and factoring charges.

It is also important to assess the allocation of the financial flow made available by unblocking of credits. Financial funds available in advance thanks to the factoring may in fact be used by the companies to repay existing debts, or to finance sales development.

"Development financing" by means of factoring stresses its particular advantages and characteristics and is in fact used more within the market by the younger companies, with strong growth expectations and by customers who are highly satisfied with factoring.

Factoring produces positive effects on the various business areas with interests in commercial credit.

Commercial policy
Recourse to factoring can lead to an increase in company turnover, thanks to the possibility of unblocking credits not yet expired and therefore freeing financial resources for business development.

Financial policy
Recourse to factoring leads to a speeding up of circulation of capital, by shortening the monetary cycle (from payment for the purchase of raw materials to proceeds from the sales of the finished products) and reduces the financial requirements of the company.

Organisation
Factoring gives staff dedicated to client relations the possibility to concentrate on production and other commercial aspects.

The transfer of credits within a factoring relationship is a normal fact of life for companies and is, in fact, a sign that the supplier company is capable and modern from a "management" viewpoint.

On the contrary, the transfer of credits within a factoring relationship is a normal fact of life for companies and is, in fact, a sign that the supplier company is capable from a "management" viewpoint, in other words it handles its own credits with care and also the connected planning of cash flows.

The EEC has recommended that Member States facilitate the spread of factoring within companies, as this is a useful tool for a more efficient management of credits which are the object of commercial transactions.

Those who do not know much about factoring, tend, in some cases, to think of it as a marginal financial tool and/or for the recovery of problematical credits and as a consequence see a recourse to factoring as a sign of financial problems and deterioration in credit portfolio, associating this basically with companies in difficulty.

In any case the truth is that only a small part of companies have had problems with their customers after these have been assigned within the scope of a factoring relationship.

Factoring is an ideal complement for relations between bank and company.

Factoring is a tool used to professionally manage credits, used by companies who are attentive to their relationship with customers and the relative programming of cash flows.

It is not a "rival" to bank lending but rather a financial component which can be utilised as a complement to other sources of financing which are available, in order to diversify the company's liabilities.
A modern bank therefore is favourable for its customers to make use of factoring.

According to the survey on demands for factoring by Italian companies, it appears it is the banks themselves which are one of the main channels to make companies aware of factoring.

Banks also promote many initiatives concerning factoring in our Country, either through the establishment of specialist factoring companies or by the direct execution of this business.

In effect, factoring may be a considerable element to consolidate ties with customers, as it makes for a lasting relationship with the company in order to be able to assist it over time with the administrative, organisational and financial functions relative to credit management.