Factoring is a financial service that combines many legal agreements. Many people confuse factoring with the assignment of receivables. It consists in the immediate collection of financial receivables by a factoring company for the benefit of a factoring recipient. The payment of the debt is in the amount less than its value. The difference is the profit that accrues to the factoring company. A factoring agreement allows an entrepreneur to increase the turnover of capital. This may be crucial for companies where a high turnover of inventories affects the increase in margin.
How does factoring work in practice?
In practice, factoring agreements involve companies with a sufficiently high margin on the product. Part of this margin is devoted to the speed of capital rotation in the company. Immediate payment execution enables the company to raise capital, buy and sell goods again. If the cost of debt transfer (the value of the debt less the amount received from the factor) allows you to sell again in the settlement cycle at a price exceeding the cost of factoring, it allows you to generate additional profits for the entrepreneur.
Factoring – Legal basis
The agreement is an unnamed type agreement in Polish law. It is based on the Civil Code and the Commercial Companies Code. Due to the untypical nature of this agreement, it is necessary to specify its content precisely by the parties. You identify any potential doubts at the very beginning. Due to the large amounts that may be the subject of the transaction, the losses resulting from underdevelopment of the agreement may be greater than the benefits of the agreement itself.
Can my company benefit from this?
Of course. Your company can benefit a lot from a factoring agreement. First of all, you can show your potential contractors that your receivables are secured. This is a clear signal to them that you have financial liquidity. You can negotiate better conditions for your company and expect discounts for regular payments. As a result, companies that maintain financial discipline are perceived as trustworthy.
In addition, it allows you to present yourself to the bank as a company with limited risk. This way you can be sure that the bank will remain positive towards you and your credit applications.