factoring -Word we can also find as I factoror in its English loanword factoring– is the activity that brings together the following circumstances and seeks to solve them in a financial solution: the short-term liquidity needs and the difficulties in accessing conventional sources of finance to meet the emergencies of small and medium-sized businesses that they also have , for general claims after 30, 60 or 90 days representing real assets of each company.
basics of factoring
In its basic scheme, the operation can be explained as follows: A financial intermediary (also called factor) buys from a company (or assignee) a receivable that represents a payment obligation to a third-party company (or debtor), expressed in an invoice, bill of exchange, promissory note and other documents.
After deduction of commission and interest, the factor immediately advances the assignor a good part of the invoice amount and completes the balance as soon as the debtor enforces the debt within the stipulated period.
The digital platform for financial education Investopediasuggests the following example when defining “factor” (we will paraphrase it in Spanish, avoiding proper nouns):
Suppose a factor X has agreed to buy a receivable from Y representing outstanding receivables from H for $1 million. Factor X reduces the invoice amount by 4% and advances Y $720,000 into $1 million. The costs and commissions resulting from this fictitious example are $40,000.
That Factor chain international (FCI), an international network of factoring companies based in Amsterdam, Holland, sees this activity as one complete financial packagethat combines working capital financing, credit risk coverage, accounts receivable and collections services.
The benefits of factoring In companies
Frequently plagued by day-to-day emergencies, SMEs can find several in factoring Advantages:
- liquidity and the ability to receive instant cash.
- Does not require collateralin contrast to conventional credit products.
- outsourcingsince the factor takes over the collection management, which facilitates the punctuality and closure of the accounts.
- cost savingsin time and money that companies will no longer spend managing that portfolio.
- Better financial planningby ensuring certain processes and deadlines.
In the specific Latin American context, with a large number of micro and small companies with no credit history, the factoring adds a double benefit: on the one hand, it solves the financing problem without resorting to potentially costly debt; On the other hand, it accepts qualification process that can help improve customers’ risk profiles, hypothetical loan subjects on more favorable terms.
That factoring in Latin America
the branch of factoring is still in its infancy in our region. And be growth potential it’s very big.
To give us an idea, the FCI network integrates only 23 factoring companies from Latin America and the Caribbean (Argentina 1, Bolivia 1, Brazil 2, Chile 4, Colombia 1, Costa Rica 1, Ecuador 1, Honduras 1, Mexico 3 , Peru 4, Dominican Republic 2, Trinidad and Tobago 1 and Uruguay 1), a comparatively small number compared to the 120 Europeans and 100 Asians.
However, the sector shows increasing institutionalization. In the last twenty years, among other things, the Chilean Factoring Association (ACHEF), the Mexican Association for Financial Factoring and Related Activities (AMEFAC), the Costa Rican Chamber of Factoring Companies (CCEF), the Brazilian Factoring Association (ABFAC, based in São Paulo) and the national one Latin American Factoring Association (FELAFAC, based in Santiago de Chile).
In an increasingly open region in general with exporting SMEsincreasingly integrated transnational retail chainsthat factoring International also offers you another resource for smooth operations by covering the risk of your buyers abroad.
Nothing unusual considering that the pioneers of factoring international are from our continent. Back in the colony, in times of commercial globalization, the American lumber and cotton producers already had their agents or factors in Europe who advanced funds for the supplies. Otherwise, it would be difficult to sustain production while waiting for the ship to reach its destination.