What is factoring?

 

Factoring is a contract whereby the company transfers its existing or future credits to a specialized company, in order to immediately obtain liquidity and a series of services related to the management of the assigned credit, i.e. their management and administration, the collection and advance of the credits before their expiry.

The factoring company , therefore, assumes the burden of collecting the amount of credits upon payment of a commission, and often also provides financing to the client company in the form of advances on credits that have not yet expired.

The regulatory reference that governs factoring is Law no. 52 of 1991 (relating to the purchase of corporate credits) which provides for the existence of a special register of companies that practice the assignment of corporate credits. Factoring, therefore, is an atypical contract that finds application in the presence of certain conditions:

 

• The transferor must be an entrepreneur;

• The factor must be a company or entity registered in a register kept by the Bank of Italy (a bank or a financial intermediary);

• The credits that are transferred must concern the contracts stipulated by the transferor in the exercise of the company;

What are the subjects involved

With these premises, the parties involved in a factoring contract are essentially three:

• the Factor, that is, the specialized operator who takes charge, manages and finances part of the loans of a company in advance;

• the company that transfers its commercial credit to the Factor in exchange for liquidity;

• the transferred debtor, i.e. the company with which the transferring company has a supply contract.

Why resort to factoring

The use of factoring is widespread especially among companies operating in sectors where the delay of payments to customers is a critical success factor, but also among SMEs that work with the public administration and often have to deal with payment timelines difficult to reconcile with the financial needs of suppliers.

The transferring company, in fact, receives the amount of the transferred credits, before their expiration, less a consideration that constitutes the factor's profit. Behind the factoring contract, therefore, there is a real financing operation for the client company, which in this way will be able to count on a cash liquidity useful to pay its suppliers and continue with the business activity, avoiding to incur bad debts due to late payments from customers.

And in a period in which proving to be a healthy and regular company in payments is increasingly indispensable, factoring can really prove to be a vital tool for SMEs.