Factoring is one of the most complete tools for credit risk management and company financing. Operationally, factoring integrates credit insurance and financing and adds being proactive to provide credit to the management and to the recovery process.
It is an activity fundamentally developed by banks or financial entities and is based on the legal instrument of cession of credit. Although there are several modalities, factoring in its most complete version provides that the Factor (factoring company) through the assignment of credits, acquires the credits that an entity holds over another entity. This has the effect on the balance sheet in reducing the customer’s account and average payment term and improving the financial ratios of the company, in addition to improving cash-flow and mitigating credit risk.
Like the instruments we have discussed in the previous articles, factoring has a long history and has undergone a significant development in the last century and of the instruments used to facilitate credit management and financing of companies' customer accounts it is undoubtedly the instrument with the greatest use and diversity of modalities. It is used worldwide as well as in Europe, where practically all countries have a relatively mature market and a relevant penetration rate. The credits taken by Factor correspond to approximately 10% of the European GDP and are mainly in the United Kingdom, France, Germany, Italy, and Spain.
Unlike other solutions available in the market, it has maintained constant growth over the last decades and is very much focused towards SMEs, offering global solutions for Client portfolio management, but also a partial service and even invoice-to-invoice. It is, therefore, a complete and flexible tool to support the liquidity of SMEs, facilitating trade in both domestic and export markets.
As we mentioned before, it is a service with several modalities:
- Without recourse: financing, credit management and recovery and credit risk coverage.
- With recourse: Financing, management, and credit recovery.
- Invoice discounting: is the form of invoice financing and is usually confidential, where the clients are not aware of a Factor's involvement. The invoices are purchased, once approved by the Factor, who in this case will not take care of the debt collection, which remains the responsibility of the client.
- Confidential: especially developed for large companies that do not want their clients to know about the existence of a factoring contract.
- Reverse factoring: the financing is offered to all suppliers of a single buyer and not to the customers, hence the name "reverse".
- Maturity factoring: financing is generally made available once the invoice is due for payment.
It should be noted, however, that both financing and credit risk coverage are usually not 100%. The credit risk coverage follows the same standards as the credit insurers - between 80%-90%. By the way, a large part of Factor has its portfolio of non-recourse credits guaranteed by a credit insurer and the financing, as a rule, varies between 70%-90%.
Despite these limitations, it is undoubtedly a solution that has been able to adapt and develop, and is available to all types of companies, with a strong focus on SMEs. In this segment, micro and small companies are still excluded, as they are often unable to bear the costs involved or are unable to access the service due to their insufficient size or sector of activity, or due to risk analysis, among other reasons.
As we can see, there are similar characteristics between the Barter model and factoring:
- Both analyze and monitor the credit risk of companies.
- Both mitigate credit risk.
- Both allow invoice-to-invoice transactions, where Barter has total freedom and Factoring does not.
- Both facilitate the cash flow of companies, since in Barter a company sells and automatically receives the credits corresponding to the sale made without having to wait for the receipt in fiat money, nor pay interest.
- In Barter, there is, therefore, no need for credit recovery, nor indemnity, and the seller still receives the value of his credit at the time of the sale.
The potential synergies between these two activities are numerous and in all the new markets where Bartercard intends to establish itself in continental Europe, there is already the presence of factoring companies with fully equipped teams and a commercial network that knows and accompanies their clients. This would allow for a rapid dissemination of this new service. Furthermore, if factoring companies were to add the Barter model to their portfolio of services, actively promoting commercial transactions not only between their clients but potentially with all the companies that are part of their databases, the additional business potential and advantages for all parties involved would be immense.
Factoring Companies can monetize new business relationships between entities that are part of their databases, clients, and clients of their clients, and even with suppliers. There is no need to reinsure Barter target operations, nor to set up mandatory provisions in accordance with current legislation for the insurance/finance sector, since Barter is a service. They increase revenues by providing new services to companies. They add value to the economy by facilitating commercial transactions between companies, many that by their size, are on the margins of traditional financial/insurance products.
For businesses, this is an additional channel for generating new business. It’s a credit risk management solution for uninsured customers. It’s also a solution for companies in the micro and small business segment, which have not benefited from access to this service that allows them to perform secure transactions without fiat money - saving Euros and improving cash flow.
Factoring Companies, could count on all the tools from Bartercard to launch this new line of business quickly and successfully, including:
- Business transaction management platform.
- Online access technology for clients via web and App.
- Company and services and/or products directory.
- Training and support documentation.
- Support in operationalization and credit risk management.
A close collaborative relationship between Bartercard Continental Europe and Factoring Companies, brings these and other advantages to all parties involved and allows us to extend the provision of a complete credit risk management service to micro and small businesses, which have not had this type of solution at their disposal.
For us, it is one of the fastest and most effective ways to launch a Bartercard Europe operation in every European country.