Factoring is a form of short-term commercial finance whereby liabilities against goods and services that are not yet overdue are purchased. The Factor maintains the sales ledger and performs other administrative tasks relating to accounts receivables functions, collects the accounts receivables and provides protection against debtors insolvency.

Convention on International Factoring (Ottawa 1988) defines a factoring agreement, which is a contract between two parties: the Client (Supplier) and the Factor. As a result of the agreement the Supplier transfers to the Factor receivables that are not yet receivable and arise from sales contracts concluded with the clients.

Pursuant to the Convention the factoring company is to perform at least two of the following functions:

• finance for the supplier, including loans and advance payments
• maintenance sales ledger
• collection of receivables
• protection against default in payment by debtors

Financing of the day-to-day business operations

• factoring company purchases not overdue receivables
• the client receives cash prior to the invoice payment date

Improvement of receivables turnover

• funds are transferred in max. 2 days after the factor receives the invoice
• funds are paid in accordance with individual limit adjusted to the company's financing expectations
• limit is renewed as liabilities are paid by the client and new invoices are presented for purchasing

Liabilities management

Factor is responsible for administration issues:

• Debtors' ledgering
• Service of liabilities
• Monitoring
• Reporting

Supervision of payment deadlines has a positive effect on the client's payment disciplin.

Claiming of liabilities

Factor shall collect payments that are overdue.

Improvement of  financial liquidity

Client:

• can raise cash against his business to business invoices without having to wait weeks or months for payment
• is able to offer preferable payment terms
• holds financial assets for the company's growth

Reduction of the risk of overtrading

Factoring service:

• decreases risk of the transaction as funds are provided in proportion to sales
• secures the company against clients insolvency
• protects against co-operation risks with new, unknown clients
• protects against default in payment by debtors (non-recourse factoring)

Better flexibility and competitiveness of the Company

Quick access to cash allows for:

• on time settlement of liabilities
• offering purchase policy in cash with discounts
• investing in the Company's growth

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