When it comes to factoring, professionals mostly perceive it simply as one of the many financial tools for solving problems that have arisen. This is not entirely true. Factoring does not just solve the problems that arise because of receivables, but is used to increase the volume of sales of goods and services. Any instrument should be used for its intended purpose and without a thought-out strategy to expand the market it will not perform its basic functions.
Factoring solves several major issues and risks faced by suppliers. Its main purpose is to solve the lack of financing while expanding the scale of production or supply. If the supplier has enough organizational, production and human resources for this expansion, then factoring almost completely covers all the necessary costs, even if the volumes are increased by several times.
The second problem that often arises in such situation is the inability to manage risks, for example, the risk that the buyer will not pay for the goods or services he is getting. Or the risk of payment delay, which can affect negatively the entire production. Due to factoring, the supplier is always protected from these problems, because the risk management is assumed by the factoring company.
The third problem is lack of human and organizational resources. With the fast growth of accounts receivable, there is an additional burden in resolving problems with accounting, communication with debtors about payments, etc. In this case a factoring company is irreplaceable, because this part of work is completely taken care of by its professional human resources.
But, as many other tools, factoring is often misused. It may become excessive for a company that does not have the opportunity or simply does not want to expand on the market, increases the volume of goods and services supply. This can affect the brand in a positive way, as well as lead to a deterioration in the financial standing of the supplier. Factoring is not a pill for every company, but only for those who really need it.