Factoring is a professional credit management tool

Factoring is an administrative aid and a financial technique which meets companies' needs in the area of supply credit management

Factoring includes a number of different services:
credit administration, management and collection
legal aid recovering credits
assessment of customers' dependability
advance payment of credits before they fall due
guarantee of successful conclusion of operations

Factoring is therefore not an alternative to bank loans, but it definitely offers a financial component which may be used as a complement to other sources of financing available to the company.

Factoring can be useful to any company wanting to entrust management and control of its credit portfolio to a specialist

Factoring is necessary where there is an unbalance between a company's trade credit policy (payment terms and conditions granted to customers purchasing the company's products/services; funds used to financially "support" deferment of payment; forms of settlement; control of the relationship; credit collection and recovery procedures) and the resources the company can offer on its own.

Potential demand therefore exists among companies that have a "need for Factoring" for management reasons (credit administration, control, collection and insurance) and financial reasons (assessment of clientele, integration of traditional lines of credit thanks to earlier unfreezing of credits).

On the Italian market, Factoring is currently implemented in a wide range of market sectors by enterprises of all sizes.

According to a survey of demand for Factoring on the part of Italian enterprises, the "youngest" companies, fast-growing companies, companies whose business is highly seasonal, and all companies in which management of working capital is of strategic importance tend to make greater use of Factoring.

Factoring is best conducted as part of a long-term relationship with a company, allowing the Factor to support administrative, organisational and financial aspects of credit management arising during the company's operations.

Factoring is typically oriented toward establishing a long-lasting relationship with customers rather than dealing with one specific transaction, working alongside the company in administrative, organisational and financial aspects of credit management.

The areas where Factors (Factoring companies and banks) typically intervene are part of the trade relationship, accompanied by transfer of the company's credits. Factoring may also apply to future credits, in relation to contracts not yet stipulated, credits for financial transactions or tax credits.

Factoring can also apply to Italian suppliers' (exporters') credits with buyers in other companies and foreign suppliers' (importers') credits with Italian debtors.

The need to recover unpaid credits is the last reason why Italian enterprises turn to Factoring services.

Rapid, secure payment of funds, a contribution to credit management and a guarantee of successful collection of the company's credits are the benefits of Factoring which customers appreciate the most.

These are the three main elements determining satisfaction with Factoring services, as identified by the companies surveyed about demand for Factoring, most of which expressed more than adequate satisfaction with the Factoring relationship.

In financial terms in particular, the companies say that Factoring allows them to meet temporary requirements for cash, optimise planning of collection of payments and promote growth of sales.

Factoring is, however, a highly customised service tailored to meet each customer's particular needs and requirements.

Factoring is not yet very well known, though many companies use it frequently.

In actual fact most businesses are not very familiar with what Factoring is all about. This is a result of insufficient knowledge of the world of finance and inadequate information provided by banks and Factoring companies.

Factoring is an established tool in the economic and financial system today, and has been taking place in Italy for more than thirty years, involving tens of thousands of companies.

Generally speaking, companies that have more consolidated experience of recourse to Factoring better appreciate its benefits and specific features, and make proper use of it, as demonstrated by their methodologically correct and on the whole more favourable opinion of its benefits. Companies which are not very familiar with Factoring and use it only rarely (or incorrectly) are often victims of the clichés we have been attempting to expose here, expressing uninformed opinions which are not always appropriate to the actual situation of the Factoring market, and rarely take advantage of the opportunities that use of Factoring services can offer.

The majority of the companies using Factoring services surveyed about demand for Factoring in Italy consider it useful to continue the Factoring relationship in the future and predict that use of the tool will grow in their sectors of the market.

Factoring can save on the cost of supply credit by outsourcing assessment, administration and control tasks

Helping a company with trade credit management means outsourcing a task requiring a high degree of specialisation, and relieves the company of the structural costs involved, which are borne by the Factor (Factoring company or bank) in a more economical way thanks to economies of scale implemented, for instance, in the collection of information on transferred debtors and specialised credit management skills.

Factoring also permits transformation of fixed costs linked with direct credit management into variable costs (the Factoring commission).

Of course the possibility of replacing conventional credit management costs with the cost if Factoring, outsourcing credit administration and control tasks to the Factor, depends on the extent to which Factoring is used, in time as well as space, and long-term, extensive use of Factoring works out to be more economical for a company.

Factoring is a more complex service offering greater added value than bank loans. In order to assess its true economic benefits, the best terms of comparison to use are the average cost of loans and the cost of managing trade credits internally

Factoring is not directly comparable with conventional financial instruments such as bank loans because of the presence of the management service component.

Factoring has two kinds of costs:

a financial cost (interest) on the loan that implicitly results from payment of a credit before it falls due; the interest rate applied by the Factor will be in line with market rates, taking into account the characteristics of the customer and the risk involved in the operations; and an administrative cost (commission) applied to management and, possibly, the guarantee of successful collection of a credit; the commission depends on the type of service offered and the characteristics (due date, amount, etc.) of the credits transferred.

The economic benefits of resorting to Factoring therefore depend on comparison of the conventional administrative and financial costs and those consequent upon Factoring.

It is also important to assess allocation of the funds which will be freed up by unfreezing credits. Companies may use funds paid in advance thanks to Factoring to pay their own debts or to boost sales.

"Financing growth" through Factoring underlines its benefits and particular features, and is in fact more commonly used by younger companies with strong prospects for growth and by customers who express particularly high levels of satisfaction with Factoring.

Factoring has a positive impact on a number of areas of company management involved in trade credit management

Factoring produces a number of effects on a company's activity, affecting the areas involved in trade credit management:

Accounting
Factoring simplifies customer accounting, replacing fixed costs with variable costs and lightening items in the balance sheet regarding working capital

Sales policy
Factoring can increase a company's sales by unfreezing credits which are not yet due and freeing up financial resources for promoting sales

Financial policy
Factoring increases the speed at which working capital circulates by shortening the monetary cycle (from payment for materials purchases to collection of payment for sales of finished products) and reducing the company's need for financing

Organisation
Factoring takes care of customer relations so that the company can focus on production and sales

Transfer of credits in a Factoring relationship is a normal part of corporate life; in fact, it is a sign that a company has a valid, modern organisational set-up.

Transferring credits in a Factoring relationship is a normal part of corporate life, a sign that a company has a valid, modern organisational set-up, meaning it pays attention to how it governs credits and plans the resulting cash flows.

The EU recommends that member states encourage use of Factoring as a tool promoting more effective management of credits arising out of commercial transactions.

People who are not familiar with Factoring sometimes tend to consider it a marginal financial tool or a way of recovering problematic credits, and therefore see resort to Factoring as a sign of financial troubles and poor credit portfolio quality, associating it with difficult circumstances.

But in actual fact only a very small number of companies have trouble with their customers once they have been transferred in a Factoring relationship.

Factoring is an ideal complement to a bank's relationship with a company

Factoring is a professional credit management tool used by companies who pay attention to how they conduct their relations with customers and plan the resulting cash flows.

It is not a "competitor" of bank loans but offers a financial component which may be used as a complement to other available sources of financing in order to diversify the company's liabilities. A modern bank sees use of Factoring among its clientele as a positive sign.

According to a survey of demand for Factoring conducted among Italian companies, banks are one of the principal channels through which companies find out about Factoring.
Banks also promote many Factoring initiatives in Italy by setting up specialised Factoring companies and by offering Factoring services themselves.

Factoring is an important tool for consolidating a bank's relationship with its customers, as it encourages formation of a long-lasting relationship in which the bank works alongside the enterprise in administration, organisation and financing of credit management.

UBI FACTOR

via F.lli Gabba 1 - 20121 - Milano

Tel. 02.77.66.1 

Fax. 02.76.00.00.09

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