For many entrepreneurs, the issue is the gap between delivery and payment rather than a lack of sales. The company has supplied goods and signed documents, but the buyer pays later. Meanwhile, suppliers, employees, rent, taxes, logistics and new stock need funding.
A loan may seem the answer. However, if the shortage stems from deferred payment by a reliable buyer, factoring may be more convenient: it finances specific receivables rather than a general business need.
Factoring suits businesses that have delivered goods, performed work or provided services but are awaiting payment. It converts receivables into available cash sooner.
What is factoring?
Factoring provides financing against an assignment of a monetary claim. The company transfers its right to receive payment from the buyer to a factor, which immediately pays part of the amount to the business. When the buyer pays, the factor receives the funds and settles the transaction under the agreement.
For example, a supplier delivers RUB 10 million of goods to a major buyer on 60-day terms. Rather than waiting two months, it may receive most of the amount earlier through factoring and use it for new purchases or current costs.
When factoring may be preferable to a loan
Factoring does not replace every loan, but may be more convenient in certain situations, especially with reliable buyers and confirmed delivery documents.
Loan, overdraft or factoring: which to choose?
These products address different needs. Problems arise when an unsuitable product is used to solve a particular funding issue.
Loan
For expansion, purchases, equipment, working capital or another purpose repaid from the company’s future cash flow.
Overdraft
Useful for short-term business bank account gaps, such as a payment due now ahead of receipts expected within days.
Factoring
Suitable where a delivery, completion certificate, delivery note, invoice or other document establishes the right to future buyer payment.
For a machine purchase, a loan or leasing is more likely to suit. For a short account gap, consider an overdraft. If goods have been delivered but the buyer pays in 60 days, explore factoring.
Types of factoring
Terms depend on the factor, debtor, documents, amount, payment period and arrangement. Several basic formats matter to entrepreneurs.
Recourse factoring
If the buyer fails to pay, the factor may seek repayment from the supplier. This format is often easier to arrange, but part of the non-payment risk remains with the business.
Non-recourse factoring
The factor assumes more of the buyer’s non-payment risk. Debtor and document requirements are usually stricter and costs may be higher.
Disclosed factoring
The buyer knows that the supplier uses factoring and pays the factor. This is common, especially with major buyers.
Undisclosed factoring
The buyer may be unaware of the factor’s involvement, but these arrangements are more complex and not always available.
What the factor checks before financing
Factoring assesses the buyer, documents and actual delivery as well as the supplier. This distinguishes it from many lending products.
Debtor quality
The factor needs to understand who will pay: a major company, government customer, regular buyer or new counterparty with an unclear payment record.
Delivery documents
Usually the agreement, delivery notes, completion certificates, invoices, Russian universal transfer documents (UPD), specifications and evidence of delivery or services. Clear documentation makes assessment easier.
History with the buyer
A regular relationship with timely payments strengthens the application. A one-off transaction with a new buyer may raise more questions.
Payment period
Longer payment periods increase risk and financing cost. The factor needs to know when receipts are expected.
Supplier financial position
Although factoring relates to receivables, the supplier’s turnover, taxes, litigation, debt burden and stability also matter.
Why factoring may be declined
A rejection does not necessarily mean the business is weak. The issue may be the specific debtor, documents or transaction structure.
Concerns about the buyer
An unstable debtor, frequent late payments, disputes or unclear finances may make the receivable unacceptable to the factor.
No confirmed delivery
Factoring usually finances an existing monetary claim. An incomplete delivery or unsigned completion documents may prevent approval.
Document errors
Inconsistencies in agreements, delivery notes, UPD, amounts, details, deadlines or payment terms may delay assessment or lead to rejection.
Small or unusual debtor
Some factors prefer large, identifiable buyers. A small debtor or limited information may result in less favourable terms.
High supplier risks
Tax debts, litigation, signs of a shell company, low turnover or contractual performance problems may also affect the decision.
Documents usually required
Requirements depend on the factor, amount, debtor and financing structure. Prepare the following in advance:
- Russian Tax ID (INN) and company or individual entrepreneur details;
- buyer agreement;
- invoices, delivery notes, UPD, completion certificates or specifications;
- documents confirming delivery, completed work or services;
- payment period information;
- debtor information and relationship history;
- trial balance or management receivables data, if required;
- supplier financial statements and account turnover.
Delivery documents are crucial. A poorly evidenced payment claim is difficult for a factor to finance.
How to improve the likelihood of approval
A strong factoring application shows that the delivery is genuine, the buyer is reliable and the documents support financing the receivable safely.
1. Prepare complete documents
The agreement, completion documents, invoices, UPD, delivery notes, certificates and payment terms must be consistent. Correct errors before applying.
2. Select a suitable debtor
A major, creditworthy, identifiable buyer with an established payment history is easier to approve.
3. Demonstrate payment history
Previous timely payments strengthen the application, especially in a regular supplier–buyer relationship.
4. Distinguish factoring from a loan
If funds are needed for a future purchase, expansion or equipment rather than receivables, factoring may not suit. Consider a loan, credit line or leasing instead.
5. Match the factor to the transaction
Factors differ in requirements for debtors, amounts, payment periods, documents and sectors. Select a provider suited to the particular transaction.
When to seek help
If the business offers deferred payment, has receivables and wants funds sooner, first assess whether the transaction suits factoring.
NG Finance helps entrepreneurs, Russian LLCs and individual entrepreneurs compare factoring, loans, credit lines, overdrafts, leasing and contract financing. We assess documents, the debtor, payment periods and turnover to identify a suitable approach.
Factoring can be valuable for deferred-payment businesses. It returns funds to working capital sooner, but requires an identifiable debtor, confirmed delivery and sound documents.
Want to know whether factoring suits your business?
Submit a request. We will assess receivables, the buyer, documents and payment period, then suggest financing options worth considering.
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