Factoring Techniques

There are two possibility for developing a client-factor relationship, one traditional, the other modern, and they are not mutually exclusive.
Traditional factoring is based on the definition provided in the Argentine Code of Commerce, under which the factor is responsible only for collection management.

Modern factoring is defined as: “a permanent contract between a factoring company and its client companies, whereby the former is responsible for purchasing the trade receivables of the latter and their collection.” (Factoring and Franchising. Modesto Bescós).

This definition involves three basic functions: collection management, financing and security.

These can be described as follows:

Collection management.
This service includes not only the administration and operational aspects of the collection of receivables, but also other complementary tasks such as support for their recording on the books, status of customer debt and the bringing of legal or out-of-court action for recovery. In this instance, the factor does not assume a credit risk, but must work together with the client in the credit evaluation of the debtors that have been assigned to detect the problems that cause goods to be returned and all elements that have an impact on accounts receivable.

Financing.
Given the current limitations on the availability of credit, this function is of great significance to clients. Timely financing can sometimes help gain new business.
Small and medium size-companies in particular suffer from difficulties in this regard, as situations caused by the opening up of markets to the import of products, an increased tax burden, falling levels of consumption, etc. compromise their potential as a going concern.

In addition to these elements, current restrictions on traditional bank lending, and the costs and taxes involved, also conspire against the development of business. In these cases, factoring is a financing alternative, as it provides funds secured by assets that are not usually involved in bank credit, widening the scope of usable margins.

Factoring entities therefore represent complementary organizations specializing in a product that facilitates the obtaining of funds needed to maintain working capital at an appropriate level. This service enables a faster stock turnover, increased levels of sales and an extension in the credit terms that can be offered to purchasers.

On the basis of the information they have gathered, factoring companies evaluate the risk of the account debtor that benefits the client, allowing it to improve the quality of its customers.

Security.
There are two options available: either the client transfers its receivables with recourse, which means that the factor does not bear the risk of failure to collect from the account debtor, or the assignment is made without recourse, which means that the uncollectibility risk, whether total, partial, temporary or permanent, of the account debtor is borne by the factoring company. Usually such transactions are subject to risk acceptance criteria laid down by the factor.