In today’s article I am going to teach you what financial factoring (discount) is, I will also teach you its importance for companies.
What is financial factoring?
According to Héctor Manuel Vidaurri Aguirre, financial factoring is:
It’s a financing mechanism short-term by which a commercial, industrial, service company or natural person with business activity promotes its growth.
Promotes their growth by sale of your accounts receivable to a specialized financial organization called a factoring company.
Suppose that a small company is doing very well, so much so that its demand is so great that the company anticipates that in a month it will no longer be able to satisfy said demand.
To solve the problem, the decision was reached that the only way to meet the demand would be to expand production capacity by acquiring new machines.
However, the company faces another problem….
has no liquidity, that is, in short, you do not have money to increase your production capacity.
Whereby, needs to be financed.
Now, one option could be to ask for a loan, however, the company has a document receivable for the sale of a product to a client, which it will be able to collect in two more months.
In order not to ask for a loan, the company decides to sell that document to a factoring company to receive the money from the debt of which it is a creditor and thus be able to buy what is necessary.
Now, leaving aside the fact that the value of money changes over time, if the company sells today that document that it will be able to collect in two months, the factoring company will acquire a risk because both the client will be able to pay it, as well I couldn’t pay you.
Therefore, the factoring company is not going to pay the company the entire document receivable, but is going to apply a discount rate (interest) for acquiring said risk and why not, also because they have to earn something.
In conclusion, Financial factoring, in a nutshell, is the sale of current aprecies receivable with a discount rate applied.
Why is financial factoring important?
Below I will list some points that reflect the importance of financial factoring:
Increase liquidity (financial flow)
Factoring perro provide us with cash in a matter of hours or days (depending on the factoring company).
Also, because you are selling your aprecies receivable, the factoring companies are not going to ask you for a guarantee, or they are not going to ask you to leave something in exchange for the loan.
Therefore, it is much faster than a loan.
It should be noted that factoring companies do carry out a study to make sure that everything is in proper condition.
Depending on the type of business you have, you may have more or less risk that your clients pay you their debts.
Therefore, the factoring company absorbs that risk, however, you have to take into account that they will not give you the entire document, also called nominal value.
You do not have to leave personal guarantees
As I said before, the factoring company absorbs the risk, therefore you don’t have to leave anything against the customers’ inability to pay.
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