Factoring is not an alternative to bank lending, but is certainly a financial component which can be used to complement other sources of financing at the disposal of the company.
Factoring includes various services:
- administration, management and collection of credits
- legal assistance with debt collection
- credit scoring of customer
- advance of credits before relative due date
Factoring is useful for any company wishing 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 and the payment terms and conditions for customers acquiring their products/services.
On the Italian market factoring currently covers a wide range of commodity sectors and companies of all sizes.
Usually factoring is request by 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
The operators of factoring (factoring companies and banks) support company’s business making themselves available to receive the current and / or future trade receivables arising also from contracts, as well as receivables of fiscal nature.
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 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 getting the amount of the receivables assigned (in presence of credit standing) are some of the principal advantages of factoring appreciated by customers.
From a financial point of view, factoring allows companies to satisfy funding requirements of a temporary nature, to optimise collections planning and to facilitate turnover growth.
Factoring is a service with a high level of personalisation, in respect of the characteristics and needs of the customer.
Factoring is 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.
The companies with a greater consolidated experience of recourse to factoring appreciate its advantages.
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. Flanking a company in the management of commercial credits signifies managing, according to outsourcing logic, a function which requires a high level of specialization.
Factoring permits the transformation of fixed costs connected to direct credit management into variable costs (the factoring commission).
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 possible 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.
Factoring produces positive effects on the various business areas with interests in commercial credit.
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.
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.
Factoring gives staff dedicated to client relations the possibility to concentrate on production and other commercial aspects.
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 in handling its own credits with care and also in planning its cash flows.
Factoring is an ideal complement for relations between bank and company and it is a tool 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 utilized as a complement to other sources of financing which are available, in order to diversify the company's liabilities.