The whole point of working with deferred payment comes down to one simple thing. You've already earned, but you don't have the money yet. The goods have been shipped and the documents have been signed. But the account is empty. And it will be empty for another month, two, or even six months. But you need to pay salaries and buy raw materials. Not tomorrow, but today.
This gap between "earned" and "received" is called the cash gap. And this is the very pit into which a huge number of good, working companies fall. Especially now.
There is a tool that was invented just to close this pit. It's called factoring.
What is it, to put it simply?
Factoring is not a loan. This is essentially a sale of your accounts receivable. You have shipped the goods, and you have a signed invoice in your hands. You do not go with this invoice to the bank, but to the factoring company (factor). The factor looks at your customer, evaluates his reliability and, if everything is in order, you can expect to receive quick funds to the account from 80 to 100% of the delivery amount, depending on the conditions agreed with the factor.
In case of incomplete financing of the delivery, i.e. less than 100%, the factor returns the difference minus its commission after receiving payment from the buyer. If the financing is initially provided by the factor in the amount of 100% of the delivery, then you will need to pay the commission yourself, at the time of receiving the primary documents from the factor.
The key difference between factoring and credit is not only in the nature of money, but also in collateral. For a loan, you need collateral (property, goods), for factoring, you need the accounts receivable itself, that is, your right to claim the debt.
A loan is someone else's money. Factoring is a quick access to your already earned earnings.
As a result, you receive live working capital on the same day that you shipped the goods, rather than a few months later.
How does it work in different industries?
This tool is universal, but it solves its own specific problems in each area.
Production
Manufacturers have the longest cycle. First you need to purchase raw materials, then produce the goods, then ship them, and then wait for payment. I haven't had any money for months. Factoring here allows you to break this vicious circle. After receiving the money immediately after shipment, you can immediately use it to purchase a new batch of raw materials. This allows you not to stand idle, but to constantly increase volumes. There is even a special purchasing (agency) factoring, which allows you to finance not your sales, but your purchases.
Service sector (cleaning, security, recruitment agencies)
There's another problem here. Often the customer is a large corporation that pays with a long delay. And you have a staff of employees who need to be paid twice a month. The cash gap here is a direct threat to the existence of the business. Factoring allows you to receive money immediately after signing the act of completed work and safely cover all operating expenses without incurring expensive loans.
Logistics
Transportation companies live from flight to flight. Fuel, leasing, and driver salaries are expenses that need to be covered all the time. And customers pay with a delay. Factoring makes it possible not to "pull" money out of circulation for the repair of a tractor or the purchase of new tires. I completed the flight, gave the documents to the factor, received the money, and immediately refueled the car for the next order.
Trade and retail (especially marketplaces)
This is perhaps the most "painful" area. Suppliers working with large retail chains know that a delay of 90-120 days is the norm. And with access to marketplaces (Ozon, WB), the situation has become even more complicated. In addition to the long delays, there are huge commissions, mandatory participation in promotions that eat up margins, and the constant need to maintain a large inventory in stock.
Here, financing supplies through factoring is often the only way to survive. It allows you not to freeze money in the product that is in the marketplace's warehouse, but to immediately reinvest it in the purchase of a new batch. This gives you flexibility and the opportunity to compete.
What should I remember? Limitations
For all its appeal, factoring is not a magic pill.
- Factors don't work with "bad" debts. If your customer has already overdue the payment, no one will finance this debt for you.
- Your buyer will be checked. If your debtor has a bad financial history or a reputation as a defaulter, the factor will most likely refuse to work with him. After all, it is from him that he will receive money.
This does not solve the system problems. If your business as a whole is unprofitable, factoring will only delay the inevitable. It provides liquidity, but it does not create profit.
And, perhaps,
the most important limitation to be aware of in advance is the type of factoring. Most often, "factoring with regression" is found on the market. This means that if your customer does not pay the factor in the end, then the obligation to refund the money will fall on you.
In fact, you are acting as a guarantor for your client. There is also "non-recourse factoring", where the risk of non-payment is fully assumed by the factor, but such a service, of course, is much more expensive.
Ultimately, factoring is not a means of saving a drowning business, but a working tool for a healthy, working company.
He won't build you a house, but without him, you risk not hammering the very nail that holds all your operational activities.
These are, of course, the basics. But how this tool works in practice — what factors are reliable, what schemes are used, and how rates change — we discuss in our Telegram channel. There's only what's happening on the market right now.
Inna Zaporozhtseva
