What does factoring mean?
Factoring is the purchase of accounts receivables. It gives you an unique package of financial services that include:
- Administrative and accounting management of accounts receivables;
- Collecting the accounts receivables;
- Financing without collateral;
- Up to 100% coverage of credit risk arising from potential insolvency or bankruptcy of buyers.
Factoring is supposed to help in solving major problems accompanying the sales of deferred payment. The sale of deferred payment becomes a standard that is increasingly popular and preferred by buyers both in international markets and in Bulgaria. The postpay provides buyers the opportunity of free trade credit supply over the period in which they produce their products and implement them to the consumer. This frees them from the need to use bank credit lines and makes it easier to not issue letters of credit or bank guarantees. You can use these advantages when you negotiate trade relations.
However, the sale of deferred payment, creates a number of problems. You need to create an effective management of trade receivables resulting from the relationship, and to provide working capital to finance such as sales. You cannot be confident in the solvency of the buyer and whether if he’s going to pay as agreed or not. Therefore, it is necessary to create an effective credit control and collection procedure of the due funds.
And in that case, the factoring services can help you. It is a tripartite transaction between:
- The financial institution (Factoring Company);
- Organization, which is selling goods or services (You);
- Trade debtors (Buyers).
The factoring company (also called Factor) is your partner, which is fully handling your business relationship with the deferred payments. The so-called Factor provides a unique package of services thanks to which you could increase the working capital of your company, to finance its development by combining it with professional management of claims and in most cases covers the risk.