Fine Factoring for the Best Policies for the Company

A company with invoices or receivables can make sure to collect money from them very quickly by “giving in” to a specialized financial institution called the “factor “. On the other hand, it does not cover the risk of non-payment and will be used on the guarantee fund supplied by the company if necessary. Note that the factors offer credit insurance contracts that allow the company to be fully protected.

Both parties sign a factoring contract that details the total amount of receivables that can be assigned. This amount is called the total outstanding amount. The factor company is the with the best deals.

That the factoring contract is indefinite, which means that the company can choose to leave at any time, subject to a 3 months’ notice and the terms of the contract signed beforehand.

The factor also determines the guarantee fund upstream of the signature of the contract, on the basis of a percentage between 5 and 25% of the total outstanding amount. This rate is determined by the risk that the factor believes to take and the negotiations that may take place. Thus, the factor levies on the invoices assigned to it a percentage equal to the rate of the guarantee fund until it reaches the expected amount of the latter. It will be used to cover (at least partially) the factor in case of unpaid or expensive recovery procedures.

Now, let’s explain this history of outstanding and guarantee funds with an example

Let’s say that a company chooses to use factoring and negotiates a total outstanding of $ 100,000 with its factor (the sum of the receivables that it can sell). The latter assesses the risk incurred (litigation, unpaid…) and determines the rate of the guarantee fund.

Then, the time to feed the guarantee fund, the factor takes a percentage on each invoice that the company gives him.

Once the amount of the guarantee fund is reached, then the company can be financed up to 100% of the assigned receivables.

On the other hand, there are a number of costs inherent in the factoring that the company will have to pay to the factor:

The fees

The factoring commission, which takes the form of a percentage of the turnover that the company, pays to the factor in exchange for its services. Generally between 0.7 and 1.5%, this rate is determined by the factor on the basis of several criteria, such as the turnover achieved over the previous year, the financial health of the company’s customers, or the amount of bills to be processed.

  • The financing fee is proportional to an interest rate negotiated with the factor, the amount drawn on the factor’s account and the average payment term of your receivables.
  • To know that in case of termination of the factoring contract during the journey or its non-renewal, the amount of the guarantee fund available is returned to the company.

Note: It is not possible to use factoring to finance bills for individuals. No exceptions apply to this constraint, so this is a point to consider before moving towards a factoring contract.