General Aspects related to Factoring

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1. Introduction

2. Development.

3. Classification of Factoring (Factoring)

4. Conclusions

5. Bibliography

1. Introduction.

Is common for companies facing various problems in the beginning are:

* The high level of funding for institutions

* The difficulty in accessing other resources.

* The traditional administrative organization in the production units

* The traditional practice outdated and sometimes kept in sales and customer relations.

To this must be added that brings credit sales, or

* The lengthening of the billing cycles.

* The lack of immediate liquids

* The possibility of not charging

* The need to maintain permanent staff knowledge of the creditworthiness of borrowers.

All this constitutes a threat to achieving financial balance, so it is necessary to search for funding alternatives.

One is the Factoring (factoring) that becomes the means to prevent and control such problems. Factoring in its traditional conception includes the management and collection of receivables by customer and accepted by the factor, which according to the contract assumes the risk of insolvency of debtors.

These few ideas can deduce the position and the importance and impact of factoring as a solution to these problems. The use of this service facilitates the management of the company especially when it comes to sales abroad. Factoring has begun to be accepted as part of commercial life, and although there is wide scope for the dissemination and full use of it is expected that within a reasonable time occupies a significant place in the economic context.

Due to the above, it is necessary to present a synthesis of the major theoretical aspects related to the product Factoring.

2. Development.

Sales are the main income of a business, and the main expense is the cost of goods sold. Net sales less cost of goods sold is known as gross margin or gross profit. This amount measures the success or failure of the business of selling their products at a higher price than you paid for them. Sales can be made in cash to or credit. A cash sale is the operation of selling goods or services immediately receive the amount of the transaction. Most of the sales made by wholesalers, manufacturers and retail merchants are credit to provide greater business agility, and build a large and growing base of profitable sales.

The Uniform Commercial Code defines sale as transfer credit the economic rights in goods or services from seller to buyer for a price, with payment deferred. The original credit sales seller a variety of problems that can be classified as:

* Administration: It is necessary to search for information on creditworthiness of buyers, permanent knowledge of the amount of claims and proceedings related to the recovery thereof.

* Risk. Because of the possibility of insolvency.

* Financial. Need in many cases to recover before the due date the amount of credit sales.

Credit sales, result in accounts receivable, credit terms usually include stipulating payment in a specified number of days. Although all accounts receivable are not paid within the credit period, most of them are converted into cash within a very less than one year, consequently, they are considered current assets of the company, which lends great attention to efficient administration. Credit policy in a company sets the standard for determining whether to grant credit to a customer and the amount thereof. The company must not only deal with established credit standards but also the proper use of these standards when making credit decisions. Should develop appropriate information sources and methods of credit analysis. Every aspect of this policy are important to the successful management of accounts receivable. It is necessary to recall the definition of accounts receivable.

According to Charles T Hongren, accounts receivable includes the amount of the sale of goods or services in exchange for a verbal or implied promise to receive cash in the future. Also defined as the right against the cash account with a customer.

Jackson Lester Bittel and Ramsey’s Encyclopedia defines Managemeny accounts receivable as the second entry form most liquid asset of the company. Are created as a result of credit sales and is one of the biggest games Assets.

Accounts receivable are now a problem for many entrepreneurs, the fact is the lengthening of the billing cycle that brings temporary financial difficulties of the company, so the inability to collect accounts receivable becomes a the leading causes of bankruptcy. Therefore, the wise management of credit in a

flexible and timely information is crucial in the business world, and indispensable for competitiveness and growth.

The growth of a company depends largely on its liquidity. Many expansion projects and credit sales are dashed by lack of cash immediately. Today, companies export more and the risks of insolvency of their customers in addition to affecting the margin of the company, it weakens their results and constitutes a permanent threat to achieving financial balance, so it is necessary to search for different variants financing including factoring found.

According to Lawrence J. Gitman, in Fundamentals of Financial Management, factoring involves the direct sale of accounts receivable to a factor company or financial institution.

The Dictionary of Economics and Management Factoring defined as the sale of accounts receivable. A commercial company can turn your invoices into cash ceding their rights to a factor or a factoring company, which anticipates the amount deducted or invoices to the company after deducting the interest on the remaining time to maturity and a premium to Remuera to a mediator for services provided and the risk assumed.

Factoring SA BDF defined as a short-term financing backed primarily by commercial documents: common and credit such as bills, notes, checks, contracts and other commercial documents.

According to studies conducted by the University of Economics in Mexico, Factoring is a specialized service used by a number of companies, which is the immediate conversion of its accounts receivable due no cash, so swiftly that provides liquidity necessary working capital in business.

J. Fred Weston defines it as a way of financing the purchase of accounts receivable by the factor without liability to the borrower (seller). The buyer of the bins is notified of the transfer and payment made directly to the factor. The company that makes the factor assumes the risk of non-payment for bad debts, so you should check credit, and can rightly be said that factors not only provide money, but also a credit bureau for the borrower.

The Encyclopedia of Management defines the name Factoring Debt Collection, which consists of the purchase of accounts receivable, with the buyer or a commission agent, who assumes the credit risk.

Factors Chain International (FC) defines factoring as assignment to a financial intermediary called factor, of the payment of loans granted to customers, at a cost set in advance, which can assume or not the risk of the operation.

The Ministry of Finance and Prices in Cuba Factoring is a contract assignment or sale of accounts receivable that has an entity (client) to a financial institution or bank that specializes in these services (factor), for sales of products not diminish with ease and the date for payment has been agreed in the short term.

After analyzing the above definitions we can say that Factoring is a financing option that is executed through a sale of accounts receivable. It is an operation consisting of cash advances against invoices arising from commercial transactions, including the assignment to the factor receivables in order to perform the collection on account and client representation.

The contract which is referenced must contain full details of the transaction, including:

* Moment of factoring: Refers to when that occurs the Factoring Agreement.

* Type of Factoring: Define the type of service contract. (See section 1.3).

* Full or partial payments: We agree if the customer receives their bills in full at maturity, or if you receive an advance.

* Expiration date: Contains the due date assigned accounts.

* Interest receivable: It provides the percentage charge for the factor advances if the invoiced amount.

* Factoring Committee: Fix the percent charge to cover administration costs, verification and credit charges made by the factor.

* Other issues.

The contract also has the following characteristics:

* It is a consensual contract is perfected by the mere consent of the parties.

* The bilateral as in it are born out reciprocal obligations for both parties.

* The consideration, as both sides seek to obtain a benefit of the party.

* It is a successive chain of contract because it forces both parties to successive performance.

* This is a contract of adhesion because the client merely accepts the terms of the factor without proposing amendments.

As there is no legal provision regulating the Factoring this contract falls within the category known as atypical contract.

Persons involved in factoring.

The procedure followed for factoring receivable is as follows:

* Make an agreement between the factor and seller to specify the legal obligations and procedures by signing a contract.

* Writing a document of approval of credit when the seller receives an order from a buyer.

* Send the document to the company factored to approve the loan and served the order and invoice rings to notify the buyer to make payment directly to the Factor.

Factoring in a contract involving two parties: the donor (customer) and the transferee (factor), but the relationship that generates the contract involves a third party who owe. Therefore, we can say that the National Factoring (one of the classifications of factoring), that is, the operations corresponding to internal trade, involving three subjects.

* Borrower, Seller or Customer: The company sells its accounts receivable, which originated from the sale of goods or services on credit. Usually these companies are relatively small manufacturers repeatedly sells a large number of industrial customers and distributors.

* Factor: A financial institution that purchases accounts receivable. Factor generally accept all credit risks related to accounts receivable purchasing, though the factor is the main commercial banks factoring and commercial finance companies also factored accounts receivable. The factor may offer at some point s services for exporters to protect their customers overseas bad debts and providing such expert advisers in foreign transactions. This operation is also named manager or lender. In summary, the factor runs collections.

* Buyer or required: The company that buys goods or services on credit and has become indebted to the vendor, which shall notify has factored its accounts receivable, so the buyer is obliged to pay the factor.

In the event of International Factoring factor figure is split into two: an export factor that to the customer still has the same duties and responsibilities as the National Factoring, and the important factor that acts as correspondent for the export factor to perform the functions that it can not be performed directly in the importer’s country. These two factors act through mutual cooperation agreements, usually in large international associations chains known as Factoring, which regulate the operating rules and arbitration in disputes between them.

With the International Factoring service the customer does not have to worry about billing and barriers that may exist in the country of destination of goods, such as language, customs legislation and socio-economic as well that covers the risk of delay in payment, or not to final payment by the bankruptcy of the buyer. It also offers the possibility that the companies give their customers the benefits of buying in terms of credit open, and drive away the fear of outstanding debt, or cash flow destabilizing.

3. Classification of Factoring (Factoring)

Can be found in the literature of criteria for the classification of Factoring. Given the vastness of the arrangements covering is chosen as defined by J. Fred Weston in Fundamentals of Financial Management

* Full service, No Action: This is the more comprehensive agreement, involving, financial services, assumption of risk where the factor assumes all risk of incobralidad of Customer Accounts Receivable, unless this is attributed to shortcomings of the product or services provided. In practice, the factor does not accept the accounts for some debtors, specifically those who have trade disputes with customers or other vendors. When this happens, the agency reserves the right to reassign the account to the client or accept only those few for which there is no problem. It is also known as Factoring Puro.

* Recourse Factoring: These are full-service agreements, but that does not involve the assumption of credit risk by financial intermediaries. The client retains the risk of default as the aging of accounts receivable to the factor must return the advance amount plus the agreed interest and costs.

* Self-Service Factoring, Recourse: From the point of view given by the factor is a pure funding notification of the debtor. In this case the seller (customer) is eligible for credit, but the broker does not undertake to bear the risk of insolvent debtors, and the customer who has run the collection and administration of the sales ledger accounts, to decide amount of credit offered and the period of time for which the grant. In this case the client reports daily to factor payments received from borrowers, making the service considerably more expensive.

* Factoring to maturity: Known as Factoring “Maturity Price”, is essentially a full-service operation without funding, will factor analysis of debtors and determine the amount of credit approved, it shall undertake to pay if the debtor fails does. The transfer factor balances paid by the debtor to the customer through the following ways:


  • After an agreed period from the date of invoice or date of transfer (maturity period)

    * Upon receipt of payment from each borrower according to the amount of each account or by the amount of credit approved by the factor when the debtor becomes insolvent.

    * National Factoring: When seller and buyer are living in a country.

    * International Factoring: Offer a basic number of services and provides a particular combination of them that meet the requirements of each vendor. In case of exports, the lender must contact other lenders located in the country of the buyer of the goods, which enables credit and copper studies are made on a shared basis.

    * Factoring Business: collateral loans is to offer more flexibility than a commercial bank. The lender receives your loan in support of any assets, but most portfolios. However, at maturity the drawer is in solidarity with the drawee and the lender may charge any of them.

    * Factoring Classic: It’s that provides billing services, insurance and financing.

    * Factoring Participation: the involvement expected results when performed with the intervention of a bank.

    * Conventional Factoring service: the business forward money immediately after the transfer in favor of tradable credits or bills, in turn, the debtor is notified of the assignment that made his creditor.

    * Factoring without notice: The client does not communicate to buyers that have assigned their claims by the financier or favor. It is used mainly in cases where buyers would not look good eye with the release of their claims in favor of a foreign firm to the usual relationship with your provider.

    * Factoring out via (Agency Factoring): A variety of International Factoring and is described as an agreement under which oyster entity other factor, makes the collection (usually the same vendor). This mode is a full service agreement, but does not include collection activity and only sometimes assumes the credit risk and monitoring and control over sales.

    Discount * Invoice: Involves funding, but without notice to the person paying the interest factor. The client makes the monitoring and auditing of its accounts and the broker does not assume the credit risk if the debtor fails to make the appropriate payments, therefore it is the client who must pay directly to the factor for financial support and who also handles collections .

    * Factoring “Unrevealed” discount is described as a bill whereby it offers a limited amount of credit that regularly is 80% of the total discounted, with the aim of encouraging the customer to meet efficiently the functions management and control of credit granted.

    Importance of Factoring. Advantages and disadvantages of its implementation.

    Factoring is convenient and advantageous because it allows Credit Sales convert like cash, preventing the company is facing a lack of liquidity imbalances immediate plan also allows for certain financial flows to suit us since the beginning of the cycle of operations discounting the future liabilities; in this way, the company improves:

    * Your financial and commercial management.

    * You can offer your business customers without affecting their cash flow.

    * You can improve the relationship with suppliers.

    * Manage inventory appropriately.

    * Facilitate the growth of the company.

    Factoring operation aims to assist manufacturers and traders in the organization and holding of its accounting and billing processes and services launched in the market.

    The Factoring Agreement provides a plurality of administrative and financial services, such services primarily include the management and collection of receivables by customer and accepted in each case by the factor, which takes on the contract conditions, risk insolvency of debtors. This traditional concept (Old line Factor) has evolved incorporating Factoring granting cash advances to customers on the amount of the receivables (New Style factor) also involves other services such as: the study of credit rating of borrowers by assigning a risk line to each of them, integrated management of the recovery of claims, accounting services, and regularly reports on the status of the account of each of the debtors.

    Factoring gives businesses a set of advantages and disadvantages which are presented below.

    The advantages are:

    * Represents a flexible funding source. When a company needs to increase and more funding bill is automatically generated.

    * Has the ability to give correctibilidad of credit sales to cash sales.

    * Garantiria bills provide for a loan that otherwise the company would not be able to obtain.

    * Reduces operating costs by assigning accounts receivable to a company dedicated to factoring.

    * Removes the credit department of the company, when determining what are acceptable credit risks.

    * It provides liquidity, allowing you to obtain discounts from its suppliers for prompt payment.

    * Money for purchases of opportunity immediately.

    * Provides protection in inflationary processes to have the money in advance, with which it does not lose purchasing power.

    * In the event of International Factoring, increase exports by offering more competitive payment.

    * Elimination of Collections Department of the company, as normally the factor accepts all credit risks should cover collection costs.

    * Ensures a known pattern of cash flows. The company sells its accounts receivable knows that receives the least amount of accounts factoring commission on a certain date, the cash flow planning of the company.


    * This financing method is inconvenient and costly when invoices are numerous and relatively small in amount, increases the administrative costs required.

    * Factoring is considered with its sign of financial weakness that can make future business because the company is using as collateral a highly liquid asset.

    * A company that is in temporary financial difficulties may receive very little assistance.

    * The companies engaged in factoring are impersonal, therefore not tolerate that his client fails due to a problem, because it is out of the market.

    * The only factor will purchase accounts receivable you want, so the selection will depend on the quality of them, ie their term, amount and recoverability.

    It is quite difficult to determine the validity of the belief that factoring accounts receivable is a sign of financial weakness that can be detrimental to future business, because each arrangement is unique factorization, the advantages and disadvantages can only, evaluation by the specific conditions established in each contract.

    4. Conclusions

    * Factoring has become popular worldwide as a desirable method that allows the seller to cash before maturity.

    * Provides a high degree of efficiency in the company since at all times is an increase of liquid assets.

    * It is a comprehensive method, because there were 14 common types of factoring, which allows its use in accordance with the characteristics of the company.

    * Factoring is an ideal solution, if used early, which allows the company to get rid of the accounting and legal work relating to Accounts Receivable.

    5. Bibliography

    * Bittel, Lester. Encyclopedia of Management / Lester Bittel, Jackson Ramsey .- EU: Ocean Publishing Group SA, MCMXCII, p.273.

    * Accounting .- [S.L: s.n, 197]. -P. 42.63.

    * Bittel, Lester. Encyclopedia of Management / Lester Bittel, Jackson Ramsey .- EU: Ocean Publishing Group SA, MCMXCII-p. 66.67.

    * GITMAN.Lawrence. Body Basics Fiance / Lawrence Gitman. – Mexico: Editorial Harla, 1978.p. 461.

    * Factoring. Dictionary of Economics and Management. In: Society of Factoring .- Spain. Editorial-Service General Technical Publications, [199] .- 111p

    * Factoring SA BDF Copyright 1998. All rights reserved.

    * MONTIEL Salazar, Gerardo. Factoring Institutions in Mexico / Gerardo Montiel Salzar. – Mexico: Editorial Banking and Trade, SA de CV, 1996.-p. 12

    * Fundamentals of Financial Management .- [sl: sn, 197]. – P.274

    * HERNANDEZ Albertini, Lidia. Figure Financial / Lydia Hernandez Albertini .- Havana: Prepared by the Ministry of Finance and Prices, [199] .- 15 p.

    * WESTON, J. Fred. Fundamentals of Financial Management / J. Seventh Edition FredWeston .- .- Mexico: Editorial Interamericana, [199] .- P. 274,275,788.


    Msc Vilma Morales Gonzalez

    Msc Damarys Hernandez Castillo.

    Ms. Niurka Perez Lara.

    Msc Damarys Diaz Fuentes.