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1. Credit risk management business model
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Credit sale is actually a loan to the buyer. If the buyer does not pay, it will form a bad debt. Therefore, the seller signing a credit contract is actually signing a credit contract.
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Before signing the contract, the enterprise should know the buyer’s business status and credit information as well as the bank, conduct credit rating, and determine whether to sell on credit, the term and limit of credit sale.
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If these works are not done, just like the bank did not investigate and directly lend money, the probability of bad debts is high.
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However, the seller usually lacks the professional ability to judge credit risk. As a professional commercial credit management factoring company, it can provide the seller with corresponding services to help customers investigate the buyer’s credit status, select credit customers, set credit lines and conditions, control bad debt risk in advance, and adjust credit lines and conditions according to the actual transaction.
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For customers with deteriorating business conditions, the credit line should be reduced or stopped in a timely manner.
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In this way, the bad debt risk of accounts receivable is controlled, which also lays a foundation for enterprises and factoring companies to carry out financing business.
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The credit risk management business model of credit sale requires the factoring company to have the ability of enterprise credit investigation and commercial credit risk assessment.
2. Business model of accounts receivable management
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Domestic factoring institutions rarely manage customer sales sub accounts, usually just register the transferred accounts receivable and monitor the collection account.
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Due to the lack of overall understanding of customer sales, it is difficult to control the amount of accounts receivable, approve accounts receivable, and determine the term. There are two main reasons why the factoring agency does not manage the sales ledger.
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The customer thinks that he has enough financial personnel to handle accounts receivable, has no demand for sales ledger management, and is afraid of exposing business information.
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The factoring agency believes that the management of the sales ledger is tedious and unprofitable.
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Sales ledger management is an important element of factoring business and a necessary means for factoring institutions to obtain information on accounts receivable. By managing sales ledger, we can learn more about accounts receivable information and make statistical analysis of the accuracy, overdue rate and bad debt rate of accounts receivable collection.
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Fully understand the quality of accounts receivable, select qualified accounts receivable for factoring financing, and determine the amount and duration of factoring financing.
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Factoring institutions manage the sales accounts of multiple customers to achieve scale and specialization. Collecting management fees can also bring considerable benefits.
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The customer manages the sales sub account, hires the accountant to pay the salary, sends the bill, inquires, checks, and urges collection.
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The fees charged by the factoring agency will save a lot compared with the fees charged by the customer to manage the sales ledger.
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The technical requirements of sales sub account management are not high. It is a labor-intensive work and requires more account management personnel.
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It is necessary to build a sales ledger management system to provide work efficiency and reduce operational risk.
3. Reverse factoring business model
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Leora Klapper of the World Bank elaborated on the mechanism of reverse factoring in The Role of “Reverse Factoring” in Supplier Financing of Small and Medium Sized Enterprises.
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Different from ordinary factoring, in reverse factoring mode, factoring companies choose enterprises with good credit as core enterprises, sign cooperation agreements with core enterprises, and provide factoring financing services to their suppliers.
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Reverse factoring focuses on reviewing the credit and transaction records of core enterprises.
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The core enterprises are usually large enterprises with high information transparency. Reverse factoring can avoid the seller’s fraud risk and reduce the difficulty and cost of obtaining historical transaction information and credit information.
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Factoring companies can carry out factoring business with multiple suppliers of core enterprises to reduce marketing costs by cooperating with core enterprises.
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Reverse factoring requires the factoring company to establish a cooperative relationship with the core enterprise, focusing on the marketing ability of the core enterprise.
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The core marketing enterprises, which are trusted by the core enterprises, need high-quality business personnel to design schemes according to the specific conditions of each core enterprise.
4. Double factoring business model
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International factoring is usually double factoring. In the dual factoring mode, the exporter and the factoring agent in the place where the exporter is located sign an agreement, and the export factoring agent and the import factoring agent also sign an agreement to entrust each other with agency business. The export factoring agent provides factoring services according to the needs of the exporter.
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The General Rules For International Factoring (GRIF for short) issued by FCI details the rules for handling international factoring business.
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Domestic factoring companies can become members by joining FCI or IFG to carry out international factoring business.
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After signing the factoring agreement with the export enterprise, the factoring company applies to the import factoring agent for approval of the importer’s credit line.
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Once the import factor has approved the importer’s credit limit, the credit risk of effective accounts receivable within the approved limit shall be borne by the import factor, and the factoring company can finance the exporter accordingly.
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However, factoring companies do not have to rest easy. According to GRIF, the import factor has the right to reverse the transfer of accounts receivable. The import factor can transfer the transferred accounts receivable back again and release all its obligations to reverse the transfer of accounts receivable.
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GRIF stipulates 6 anti transfer situations.
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In the dual factoring mode, even if the accounts receivable have been approved, it cannot be guaranteed that the import factoring agent will bear the credit risk.
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Therefore, factoring companies cannot relax the review of accounts receivable due to double factoring. In order to reduce the risks arising from this, the factoring company should understand both sides of the trade, ensure the performance ability of the exporter, and avoid the defense of the importer due to the quality problems of the goods;
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At the same time, you should know the credit standing and payment ability of the importer.
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Because the import factor acts as the agent of the export factor and the credit guarantor of the importer. If the importer is solvent, the interest of the import factor is the same as that of the exporter, and it will try its best to win the case against itself or the exporter, so as to require the importer to pay according to the judgment and avoid or reduce losses;
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If it is known before the lawsuit that the importer is insolvent, the import factor may stand on the side of the importer and hope that it or the exporter will lose the lawsuit, so as to relieve the liability for compensation.
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The solvency of importers is the key to the behavior orientation of import factoring agents.
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Therefore, the factoring company reviews the solvency of the importer and the credit of the import factor.
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With reference to international double factoring business, domestic factoring can also adopt the double factoring business model.
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In this mode, the buyer’s bank and factoring company are equivalent to import factoring, and the seller’s factoring company is equivalent to export factoring.
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China is a vast country, and the buyer and the seller may be thousands of kilometers away. Factoring companies are difficult to understand the credit standing and solvency of foreign procurement enterprises. Taking the responsibility of import factoring with the help of the buyer’s local bank and factoring company can effectively control risks and improve the efficiency of factoring business.
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The domestic dual factoring business is a business innovation, and there are no corresponding general rules for business in China, so the seller’s factoring and the buyer’s factoring need to negotiate to determine their respective rights and obligations.
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To be widely recognized by factoring companies and banks, a lot of publicity and marketing work needs to be done.
5. Credit insurance business model
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The bank has cooperated with insurance companies to develop financing products. For example, in the Rongxinda business launched by the Bank of China, for the business that the seller has insured credit insurance with China Export and Credit Insurance Corporation or other credit insurance institutions recognized by the Bank of China, the Bank of China shall provide financing for the seller against the relevant documents, relevant certificates of credit insurance, claims transfer agreement, etc.
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Factoring companies can also cooperate with insurance companies to provide credit insurance for accounts receivable and factoring financing services.
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In order to promote credit sales, the Ministry of Finance and the Ministry of Commerce jointly provide 50% government subsidies for commercial enterprises to purchase domestic trade credit insurance, encourage commercial enterprises to invest in credit insurance and obtain credit insurance financing. The actual rate of domestic credit insurance is about 1%.
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However, for the accounts receivable that have been invested in credit insurance, the factoring company cannot be guaranteed to be foolproof.
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First of all, the insurance company usually stipulates the exemption of liability in the insurance contract. Under the conditions stipulated in the exemption clauses, the insurance company will not make compensation even if the payer goes bankrupt or delays payment. Usually, there are intentional acts, violations of trade contract obligations or illegal acts of the insured and its employees;
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When the insured can terminate the performance of the trade contract according to law or agreement, it still continues to perform the trade contract;
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Nuclear reaction, nuclear radiation and radioactive pollution; War, military act, terrorist event, armed conflict, rebellion, riot, civil commotion, hurricane, flood, earthquake, volcanic eruption and tsunami occurred in the Buyer’s area;
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Administrative or judicial acts not caused by the Buyer.
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Secondly, credit insurance covers the buyer’s bankruptcy and malicious default risk, while the seller’s own performance risk needs to be borne by the factoring agent.
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If the buyer and the seller maliciously collude to modify the collection account and transfer the collection to the non regulatory account, the factoring company cannot recover the financing funds.
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The reason is that due to the performance pressure, the business personnel did not strictly implement the closed management of capital return, and most of the customers’ funds collected were still transferred to the margin account through the basic account or general account. As the enterprise’s capital chain was tight, it was easy to operate the return channel separately, and misappropriate the funds collected agreed with the Bank of China.
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Third, insurance companies usually make compensation several months after the accounts receivable are due. Even if the compensation is paid in place, there is also a liquidity risk.
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Therefore, factoring companies should also focus on screening customers, strengthen customer management, avoid losses caused by customer default, and strengthen liquidity management to avoid liquidity risk caused by delayed compensation.
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Credit insurance accounts for a relatively low proportion of insurance companies, especially domestic trade credit insurance.
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Despite the active support of the government, the development of credit insurance business is not universal, and only relying on insurance companies to recommend customers to handle factoring business, the business scale is limited.
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Factoring companies that develop credit insurance business models should actively market customers’ credit insurance.
6. Process monitoring business model of accounts receivable
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In e-commerce, in order to avoid the dishonest behavior of both the buyer and the seller, a third-party payment institution has emerged.
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When the buyer purchases the goods, the payment is controlled by a third party. After the buyer confirms receipt of the goods, the third party will pay the payment to the seller.
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In this case, the term of accounts receivable is short and the risk is low. If the seller has financing needs, the factoring company should cooperate with the third-party payment company to do a good job of process control, and the financing credit risk is low.
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There is a factoring company to finance the airline ticket receivables. After the passenger buys the ticket, the ticket agent will pay the ticket price to the airline through the International Air Transport Association, which takes about 15 days.
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During this period, airlines need funds. Factoring companies and the International Air Transport Association will issue factoring financing after confirming the amount receivable for air tickets, and recover the financing after receiving the amount for air tickets.
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The business model of accounts receivable process monitoring needs the close cooperation of a third-party company. Without the third-party company to provide accounts receivable information and transfer funds to a designated account, the business cannot be carried out.
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Third party cooperation is the key to this business model.
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The process monitoring business model of accounts receivable is usually small in single amount, short in duration, and large in factoring business, so a business processing system needs to be established to replace manual operation.
7. Receivables collection business model
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Collection of accounts receivable is the basic element of factoring business. However, most factoring companies do not take collection as their business content.
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First of all, the factoring business of domestic factoring companies is basically recourse factoring. If the payer fails to pay the accounts receivable when they are due, the factoring company will first claim compensation from the financing enterprise rather than the payer.
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Secondly, the collection of accounts receivable requires special legal talents and collection skills. Domestic factoring companies focus on factoring financing and lack collection talents. Enterprises really need accounts receivable collection services.
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At present, some law firms and debt collection companies provide receivables collection services. Law firms recover accounts receivable mainly through judicial means, and some debt collection companies adopt various means.
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The factoring company has carried out credit management and accounts receivable management in factoring business to understand the basic situation of debtors of accounts receivable. The factoring company usually has professional legal personnel who are qualified to collect accounts receivable.
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Even with recourse factoring business, it should also collect accounts receivable services. On the one hand, it can reduce the bad debt rate and risk of accounts receivable through collection, on the other hand, it can meet the customer’s requirements for bad debt risk management services of accounts receivable, collect relevant fees, and improve profitability.
8. Bad debt guarantee business model
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Factories are unwilling to bear the risk of bad debts of accounts receivable and rarely carry out non recourse factoring business.
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Customers need to purchase credit insurance from insurance companies to guarantee bad debts. Since insurance companies can provide bad debt insurance, why can’t factoring companies specializing in factoring provide bad debt guarantee?
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The factoring company can at least provide bad debt guarantee services for the debtors’ accounts receivable with good credit standing.
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Furthermore, as factoring business mainly depends on the buyer to pay, even if no bad debt guarantee is provided, if the payer cannot pay, it is less likely to recover the financing funds from the seller.
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Recourse factoring may only enjoy the right to recover from the seller in the legal sense, and it is a dose of consolation rather than nothing, which has no substantive significance for risk reduction.
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Since it is necessary to bear the credit risk of accounts receivable, it is better to carry out non recourse factoring and charge rates to cover the risk. Non recourse factoring enables the seller to avoid the risk of bad debts. The seller is willing to pay consideration for this, but only pays the credit insurance premium to the factoring company. It can also cooperate with the factoring company on the bad debt guarantee and financing needs, and avoid negotiating with the insurance company and the factoring company separately to reduce transaction costs.
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Therefore, the factoring company should choose the accounts receivable with good credit standing of the payer to carry out non recourse factoring.
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Factoring companies willing to undertake bad debt guarantee can act as buyer’s factoring agents to cooperate with seller’s factoring to carry out double factoring business, expand business scope and strengthen cooperation with buyer’s enterprises.
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Bearing the bad debt risk puts forward higher requirements for the bad debt risk management ability of the factoring company. Factoring companies that carry out non recourse factoring and buyer factoring should have higher risk identification, assessment and bearing capacity to ensure that the risk is controlled within their own risk bearing capacity.
9. Industry professional business model
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Factories in early Britain were highly professional, such as wool textile factoring, corn factoring and hops factoring. Factories in the United States were also mainly concentrated in the clothing and textile industry.
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Professional factoring agents focus on a certain industry to carry out factoring business, carry out in-depth research on an industry, understand the industry policy and the entire industry’s operating conditions, be able to more accurately judge the industry’s development trend, be familiar with the industry’s business processes such as procurement, production and sales, understand the business status and credit status of major enterprises in the industry, be familiar with the quality, price and other elements of raw materials and products, and be able to judge the enterprise’s payment capacity.
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Factoring companies focusing on an industry can take advantage of the industry’s professional advantages to provide more professional services.
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If there is a factoring company that specializes in the medical equipment industry, the factoring company can understand the manufacturer, brand, performance and price of various medical equipment, the sales ability of dealers, the payment records and payment ability of hospitals, and can accurately market target customers and control business risks. Professional factoring companies usually need professional background.
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For example, IBM and General Electric have established factoring companies in China to provide factoring services for their customers and their agents at all levels; As a coal trading enterprise, Ruimaotong Supply Chain Management Co., Ltd. established a factoring company to provide factoring services for coal distribution enterprises.
10. Bank agency model
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Factoring companies establish a good cooperative relationship with banks and cooperate with banks. In addition to the double factoring with banks described above, they can also provide banks with services they want to do or don’t want to do, and become outsourcing service providers of banks.
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When banks carry out supply chain finance business, they need inventory pledge, transfer or pledge of accounts receivable to control risks. However, banks do not have enough manpower to supervise inventory and manage accounts receivable, and the banking industry is unwilling to do such laborious and time-consuming work.
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According to the needs of the bank, the factoring company accepts the entrustment of the bank to supervise the inventory and manage the accounts receivable, provides corresponding services for it, lets the bank focus on its credit business, strengthens business risk control through division of labor and cooperation, improves business efficiency, promotes financial services for small and medium-sized enterprises, and realizes a win-win situation for the factoring company and the bank.
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Banks (especially joint-stock banks) have high labor costs and limited personnel. They are unwilling to spend energy on preliminary investigation. They hope to directly conduct business with target customers. At the same time, banks are subject to business areas and cannot handle business with enterprises in other places.
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Factoring companies provide services to banks as a marketing channel according to their needs. Understand the conditions of bank factoring business, screen customers according to the bank conditions and conduct relevant investigations, recommend business to the bank, and directly handle factoring financing business or re factoring with the receivables of the factoring company after the bank’s approval.
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Through the screening and recommendation of the factoring company, the bank has expanded the marketing channel, improved the passing rate of the business, reduced the business marketing cost, and can cross the restrictions of the business area through the factoring company. Factoring companies also break through the bottleneck of capital sources by charging intermediary fees or price differentials.