Factoring is a financial tool used by companies primarily to improve their liquidity, as it provides direct financing based on the volume of sales made by a business. Factoring is a relatively low-risk form of financing for both banks and businesses providing these services. In the UK factoring has another name i.e. receivable finance, invoice discounting, commercial finance etc.
by Trust Economics-https://trusteconomics.eu
©The law of intellectual property is prohibited in any way unlawful use/appropriation of this article, with heavy civil and criminal penalties for the infringer.
Factoring is widespread as a use in the EU (In EU it makes up 65% of the world market). Over the past decade, the increase in the use of factoring has increased; this is mainly due to the increase in the volume of international trade, the use of the internet and the increased role of commercial credit insurance companies, the restriction of the use of traditional banking tools to secure an export (guarantee letters).
According to data from the EU Federation for the Factoring and Commercial Finance Industry (https://euf.eu.com ) the penetration of factoring into the GDP of European countries is more than 11%, indicating the widespread use of services by European companies. According to the same source, around 200000 companies use the factoring option to boost their liquidity.
In the EU it is estimated that around 640 banks and/or specialized companies are active in the factoring services area. Through factoring companies have the ability to draw immediate liquidity based on the sales they make to a responsible customer base and depending on their agreement with the bank or factoring company, to be insured for the risk of non-payment by their customers.
Factoring as a financing tool is simple, flexible, and functionally fast.
Companies enter a general contract which includes all the requirements of their customers agreed with the factoring company and then, depending on their sales, have the possibility of raising working capital.
The exchange of data-requirements (invoices, credit memos, etc.) is usually done electronically as is the transfer of funds, from the factoring company to the company, as well as the buyers from the factoring company.
What is presented as a healthy element is the exceptionally low proportion of non-performing loans, i.e. the non-burdening of the balance sheets of factoring companies with loans.
The importance of developing factoring for the development of an economy is of great importance. Particularly for countries where their economies rely on the action of medium and small-sized enterprises, enhancing their liquidity through factoring is of catalytic importance.
This is because small and medium-sized enterprises have their commercial requirements as their most valuable assets and it is the quality of these which are working also as passport to ensure and provide the liquidity they need to grow.
When factoring is combined with the following two service areas:
- Credit insurance,
- Supply chain financing,
these services bring multiplier benefits.
Extending factoring from the part of commercial requirements to that of commercial liabilities and making better use of flows to normalize liquidity needs and strengthen trading links with either customers or suppliers is the most interesting area for investment.
This described above service is called Reverse Factoring or Supply Chain Finance. The European Investment Bank has integrated factoring into the financial instruments for which it provides its guarantee in favor of companies that will make use of these services.
