Finding the Covers in the Business With Factoring

The obvious condition for the application of factoring is the existence of a trade relationship between the supplier and the buyer that provides for a deferred payment. Note that this form of calculation is used in most industries and markets, where there is any significant competition between suppliers.

In addition, most federal and regional trade networks operate with their suppliers only on a deferred basis. On the Basics of State Regulation of Trade Activities in the Federation “and Certain Legislative Acts of the Federation” legislatively fixed the terms of deferrals for various categories goods. Regarding the support of the factoring companies in this case you will be able to have the best option now.

Organization of factoring in practice

In a standard factoring transaction, there are usually three parties involved: the supplier (customer), the buyer (the debtor) and the factor.

Factoring financing assumes that after the supplier has shipped the goods to the buyer, the factor bank transfers money in the amount of 65 to 85% of the delivery volume. Further, the assignment of rights of claim occurs, that is, the factor bank receives the right of claim from the supplier to the buyer and monitors the timeliness of payments. As soon as the requirements have passed to the factor bank, it transfers to the supplier up to 85% of the funds that make up the amount of claims (advance payment) after the fact of shipment has been accomplished, the remaining part (at a rate of 15% with the exception of the commission) is credited to the supplier’s account after receiving funds from the buyer.

Factoring services include:

  • analysis of the financial condition of the buyer;
  • analysis of the status of accounts receivable and accounting statements;

A factoring commission usually consists of several percent of the amount of repurchased claims, interest for deferred payments and a fixed fee for the processing of invoices.

For your information: Factoring commissions, as a rule, consist of three parts – a financing commission (interest per annum), a commission for factoring services (a percentage of the amount of the assigned debt) and a fixed fee for handling documents. To them can add the cost of insurance (in case of insurance factoring company commercial risks).

Since factoring is a non-banking service, commissions are subject to VAT, which, in turn, is transferred to the customer. The amount of VAT is allocated by a separate line in the invoice given to the customer. Since the amount of VAT charged to the customer when purchasing services under a factoring agreement is taken into consideration when determining the amount of VAT payable to the budget (Article 173 of the Tax Code), the client does not experience tangible losses from this.

The bank maintains all necessary documentation on the customer’s receivables and controls the timely payment of its deliveries, that is, completely frees the client from working with debtors, and also protects against losses if they violate payment terms.

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