A manufacturer has a contract with a supermarket chain for weekly deliveries. According to the contract, the supermarket pays for the delivery with a delay of 40 days.
The supplier has a cash flow gap: he has already paid for the production of the batch, but he won't get the money until 40 days later. During this period he has to keep working, pay rent, wages, etc.
With factoring there is a third party - the factor. He pays the supplier the money immediately after shipment. After 40 days, the supermarket transfers the money for the delivery to the factor, not to the supplier
This arrangement is beneficial for all parties involved: the supplier receives the money immediately, the buyer works on a deferred payment basis and the factor receives a commission for its services.
There are several types of factoring, including full factoring, non-recourse factoring, recourse factoring, open factoring, and confidential factoring.
Factoring allows companies to improve their cash flow, gain quick access to funds, reduce the risks of accounts receivable, and improve their accounting metrics.
Factoring can be used by companies that have outstanding invoices, including small and medium-sized enterprises, export companies, manufacturers, distributors, retailers, and many others.
The company's financial statement for the previous year, a certificate from the state register confirming the right to sign, and a list of client's supplier companies.
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