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Zhi Finance » Key points of commercial factoring operation

Key points of commercial factoring operation

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(1) Preparation and commencement of factoring business

1. Investigation of the Seller’s customers

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Factoring business is generally a business with the seller as the core service object. Therefore, it is crucial to select a suitable seller for factoring business.

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The investigation of the seller mainly starts from two aspects:

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First, it starts from the enterprise itself, including the investigation and analysis of the enterprise’s financial statements; Analysis of enterprise sales ledger; Interview with enterprise management, etc.

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The second is to investigate from the outside of the enterprise, including obtaining relevant information from the seller’s main banks and their evaluation of the seller;

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Understand the basic situation of the Seller’s industry from professional institutions; And confirm the business relationship established between the buyer and the seller through the investigation of the seller’s customer (buyer).

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The purpose of the investigation on the seller is to make a conclusion on whether the seller is suitable for factoring business, and at the same time, to evaluate the possible risks of the seller in the future factoring business.

(2) Whether accounts receivable are applicable to factoring

  1. Transferability: The accounts receivable are complete in terms of creditor’s rights, without any legal restrictions, such as the prohibition of transfer under trade contracts, agency sales, and the pledge of assets to banks or third parties, all of which constitute incomplete creditor’s rights in the legal sense.
  2. Recoverability: The factoring agent provides financing to the seller. In case of financial crisis or even bankruptcy of the seller, can the financing be recovered according to the accounts receivable? This depends on:

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(1) Integrity of rights: The most suitable products for factoring are those simple products without specific additional conditions

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That is to say, as long as the products are of the ordered variety, correct quantity, compliant quality, timely shipment and correct invoicing, the buyer must pay. There are no conditions in the contract such as consignment, installation certificate, installment payment and right reservation.

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(2) Decentralization degree of the buyer: the integrity of the rights does not mean that the factoring agent can recover the money. The most likely reason is bad debts and disputes.

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In order to reduce the possible adverse effects, it is necessary to seek sellers with more dispersed customer groups.

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(3) The buyer’s credit: If the buyer’s credit is poor, it will bring serious problems to the factoring’s collection.

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In fact, the low qualification of the buyer is also a manifestation of the poor qualification of the seller. We can analyze the aging and bad debt of accounts receivable to reveal the overall quality of the buyer.

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(4) Debt dilution: refers to the part that all buyers can reasonably deduct from the payment, including: credit list, advance payment discount, overall discount (the discount obtained after the buyer’s annual purchase volume reaches a certain number), two-way trade, etc.

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In addition, disputes may also lead to dilution of claims. The impact of debt dilution is to reduce the value of accounts receivable and weaken the security of factoring.

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We must be able to quantify all deductions and calculate the financing ratio accordingly.

The Seller’s future viability

  1. Review the overall situation of the seller, including organizational structure, capital composition, development history and industry prospects;
  2. Evaluate the management of the Seller and its management capability;
  3. Analyze the financial situation of the seller, including liquidity, profitability, etc;
  4. Knowledge of the products or services sold by the Seller;
  5. Verify the customer situation of the seller, i.e. the degree of dispersion of the buyer, the business relationship and cooperation history of the buyer and the seller, and evaluate the business relationship;
  6. Judge the fund management of the Seller, including financing purpose, financing approach and financing capacity;
  7. Make an overall evaluation of the Seller’s future development prospects.

3、 Seller’s business volume

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The factoring agent judges whether it is possible to make profits according to the business volume, which is also the basis for determining the handling rate and financing interest rate;

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Determine the workload of the factor according to the quantity of the buyer and invoice. The investigation on the seller is generally completed by the customer manager. The investigation report on the seller’s overall situation is prepared to basically determine whether the seller is suitable for factoring.

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After the customer manager has determined the adaptability of factoring business, he can enter the stage of demand analysis and selection of factoring business varieties.

1. Demand Analysis and Factoring Varieties Selection

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On the basis of reviewing the basic situation of the seller, the customer manager should assist the seller in sorting out the exact business needs, and can make conclusions through the analysis of the following issues:

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(1) Whether more cash is needed to support the continuous expansion of business;

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(2) Whether it is necessary to enhance cash flow;

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(3) Whether it is necessary to improve the ability to plan cash flow;

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(4) Whether it is necessary to open up new markets (including domestic and foreign markets);

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(5) Whether it is necessary to improve the management of the enterprise and optimize the use of personnel with the help of the professional ability of the factor;

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(6) Whether it is necessary to improve the supply relationship with customers (buyers);

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(7) Whether there are other financing channels to meet their own needs;

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(8) Whether it is necessary for the factoring agent to control the credit risk;

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(9) Whether credit control consulting services are needed.

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The customer manager reviews and writes the Demand Analysis and Factoring Business Variety Selection Report and submits it to the factoring product manager for review to determine whether the conclusions made by the customer manager can meet the customer’s actual needs.

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Especially for complex trade background, when standard products are difficult to deal with, the product manager can assist in the design of business solutions.

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Accurate demand analysis constitutes the fundamental basis for selecting appropriate factoring business varieties. Some customers may not be aware of their business needs, while others may not understand the business benefits that factoring can bring.

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This process of demand analysis can often achieve valuable communication between the two sides, which helps enterprises better understand the service value of the factoring agent, so as to obtain the best service effect with the help of the factoring agent’s service.

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In addition to being the basis for selecting factoring varieties, demand analysis is also the basis for determining the financing demand of enterprises, the credit guarantee limit and the charge of the factoring agent.

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After the product manager has approved the business plan, the customer manager needs to submit the following materials to the approval department for decision making:;

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Investigation Report on the Overall Situation of the Seller;

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Demand Analysis and Factoring Business Variety Selection Report;

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Enterprise Accounts Receivable Report;

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Enterprise Buyer Payment Record;

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Representative Trade Contract;

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Financial statements of the Seller, including balance sheet, income statement and cash flow statement;

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The approval department will review the above materials and make a final decision on whether to cooperate with the seller in factoring business.

2. Business negotiation and factoring contract

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When the approval authority decides to cooperate with the Seller, the factoring agent shall issue the Letter of Offer for Factoring Business (in duplicate) to the Seller, which shall contain the following contents:

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Business varieties and various services included;

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Various fees and specific rates charged by the factor;

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The auxiliary guarantee measures that the factoring agent requires the seller to complete before signing the factoring contract.

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The so-called auxiliary guarantee measures mainly refer to the guarantee measures to ensure that the factoring agent can obtain complete accounts receivable claims.

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In legal terms, it is to prevent the right conflict between the credit of accounts receivable obtained by the factoring agent and any third party.

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For example, if the seller has pledged the accounts receivable to a third person, or otherwise restricted the factoring firm’s rights in terms of accounts receivable, the seller must ensure that these rights are excluded.

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Under normal circumstances, the seller will issue a letter of guarantee to the factoring agent to ensure that the factoring agent can fully obtain all rights related to the creditor’s rights of accounts receivable.

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If the rights related to accounts receivable have been pledged to a third party, such as another bank, the bank needs to issue a certificate indicating that the pledge has been released, namely the so-called waiver.

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On the one hand, the seller will negotiate with the factoring agent on some commercial conditions related to factoring arrangements after receiving the Factoring Offer Letter,

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On the other hand, it will also implement measures related to auxiliary guarantee according to the requirements of the factoring.

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In addition, both parties will start drafting and signing factoring agreements at the same time.

3. Factories establish separate accounts for sales

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Once both parties have signed the factoring agreement, the first thing that needs to be done is that the factoring agent should establish a sales ledger for the seller’s customer.

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The account establishment is usually completed by the way that the seller’s customer transfers its existing accounts receivable to the factoring company in a lump sum after the account is consolidated, which is the basic basis for the future factoring company to manage sales accounts separately.

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Factoring agreements generally make specific provisions on account transfer, such as the specific date of account transfer, the method of account transfer, and the specific work that both parties should complete in the process of account transfer.

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The process of account transfer is roughly as follows:

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First of all, the seller’s customer needs to consolidate all its existing accounts receivable, and fill in the List of Outstanding Invoices according to different buyers.

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Provide accounting and original vouchers, and transfer the accounts receivable after account consolidation to the factoring agent at one time.

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The document processing department of the factoring agent shall check the accounts receivable, remove the overdue, undelivered, bankrupt, incomplete creditor’s rights and disputed invoices, and ensure that the transferred accounts receivable fully and accurately reflect the actual business situation of the seller.

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Then, according to the audited accounts receivable, the factoring agent establishes the corresponding sales sub account and financing account for the seller in the factoring system to handle the daily factoring business and account processing.

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In some cases, the seller’s account consolidation will be omitted. The factoring agent is not responsible for the business before the account establishment of the seller, but only manages the business after the account establishment.

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In other words, the seller does not transfer the past accounts receivable to the factoring at one time, but transfers the new accounts receivable to the factoring.

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The consolidation and establishment of separate sales accounts are completed under the assistance and guidance of the account manager.

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The account manager shall also be responsible for daily bookkeeping and maintenance, managing accounts receivable, recording the changes of creditor’s rights and debts among the factoring agent, the seller and the buyer, controlling the use of quota, and providing statements of account and relevant sales and financial analysis statements according to the performance and change trend of the account.

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At the same time, the customer manager shall open a special factoring account for each seller or sign an account supervision agreement for the buyer’s payment.

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After the completion of account establishment and risk evaluation, the Seller shall prepare the Factoring Business Introduction Letter on its own company’s letterhead in accordance with the format fixed by the factoring agent.

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Send to every existing buyer customer and future new customer, informing them that the factoring agent has a new business arrangement with the seller in terms of the creditor’s rights of accounts receivable, which will bring benefits to the trade between the buyer and the seller.

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Its role is to inform each debtor before the factoring business starts, so as to lay a foundation for the transfer of accounts receivable and the payment of debtors in the next step.

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If the seller has transferred all the existing accounts receivable in the sales sub account to the factoring agent, and has completed the account transfer.

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Sometimes, the factoring agent will directly send a Notice on the Assigned Receivables of xx Company to each buyer for the purpose of:

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First, inform the buyer that the accounts receivable listed in the report have been transferred to the factor, and in the future, the payment involving these accounts receivable shall be directly paid to the factor;

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The second is to verify whether the credit and debt records of the buyer and the seller are consistent. In case of any inconsistency, it is convenient to be found in time.

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