What is factoring and when to use it in your company?

When seeking financing for companies, one of the most commonly used formulas today is factoring. This is a resource not always known by businessmen, so this article will explain what factoring is with examples that will help to understand when it is useful for a company.

One of the biggest problems faced by companies is the lack of liquidity, especially when it is due to delays in the collection of invoices. This is where factoring comes into play. alternative financing system which allows a company to assign collection rights to a financial institution in exchange for immediate liquidity.

There are different types of factoring that determine the final operation of this financing channel. For example, the company can choose whether to assume the risk of non-payment or to transfer it to the financial institution. Or it can establish who collects the amount from the debtor, in which case it may not have to worry about collecting the debt if it chooses to have the financial institution collect the amount from the debtor. This depends on the types of factoring that can be chosen.

Types of factoring and which one to choose

If you are wondering what types of factoring there are, here we are going to talk about some of the most common ones such as the recourse and non-recourse factoring.

In the first case it is the company that assumes the risk of non-payment, while in non-recourse factoring this risk is transferred, so that, in exchange, the collection of the debt is guaranteed.

Obviously, the more the financial institution is involved, the more commission it will charge the company. And the fact is that factoring, like any financial product, involves the payment of commissions and even a percentage of the invoice due. It should be borne in mind that the entity assumes a risk, advances a payment that it must recover, etc.

Many companies are hesitant to choose recourse or non-recourse factoring. In fact, logic dictates that non-recourse factoring is safer for the companyThe factoring company will not assume the risk of non-payment (which, in itself, already existed before factoring was contracted). It is, in fact, the most widely used modality, although it also entails a higher cost in terms of commissions or commission percentages. 

Factoring or invoice advance?

Understand what is factoring is simple, but the concept can be confused with the advance payment of invoices. In the latter case, the company sells invoices or promissory notes to the financial institution providing the service, in exchange for a commission. A simpler procedure that does not include services such as direct collection of the invoice due, as in factoring.

One of the most important differences between factoring and advance payment of invoices is that the first formula offers greater collection guarantees, while in the second there is no such coverage. For this reason, many companies opt directly for factoring, which is also a recurring financing method and not a one-off one, as can happen in the case of invoice advances.

The easiest way to know when to use factoring or advance payment of invoices is according to the term: if the company will need this cash flow on a regular basis, it is best to opt for factoring, since it will assign the collection of all or part of the invoices generated. If, on the other hand, immediate capital is simply needed on a one-off basis, invoice advance payment may be a good idea, since it does not involve the company and the financial institution to any great extent, and the procedures are also quicker.

Prediction of non-payments by Artificial Intelligence

Formulas such as factoring or invoice advances have long been used for financing companies. However, in reality they offer little guarantee of collection beyond the authority of a financial institution claiming the amount, which sometimes even assumes non-payment.

Fortunately, technology now makes it possible to avoiding non-payments in SMEs and companies of any size. And one of the most widely used is Artificial Intelligence, capable of analyzing, before making a deal, whether the other party will generate a problem of non-payment. The idea is to anticipate potential liquidity problems, instead of responding to them with alternative financing formulas.

The Artificial Intelligence to predict non-payments It also helps to build better relationships with customers, since its analysis will help to determine which customers pay better and which pay worse. This can be combined with marketing strategies to facilitate payments to the best customers, to offer better prices or just the opposite: to reinforce the defense against the risk of non-payment by demanding greater guarantees from the most difficult customers. Ultimately, the company may even refuse business to those customers most dangerous to its own sustainability and viability.

One of the most widely used platforms is GAMCO ARM SaaSthe first software for predicting non-payments specialized in SMEs. In its two versions, basic and advanced, it allows you to monitor the risk of non-payment for a minimum of 30 days and even calculates the cost that the risk of non-payment of each customer will generate for the company. 

In this way, the company will be able to mitigate risks before they occur, as well as manage its cash flow correctly and know whether the debtor is taking actions compatible with avoiding payment of the debt. And this is because it has a early warning system which will alert the company of every suspicious and potentially dangerous movement, offering, for the first time, advanced, intelligent and predictive management of non-payment risk.

Therefore, by factoring or advance payment now joins a much more useful, efficient and cost-effective predictive option: the software to predict non-payments with Artificial Intelligence. The most modern formula to guarantee the company's liquidity in a convulsive and changing environment in which multiple risk variables for the business converge.