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Factoring and advances on invoices: similarities and differences

Obtaining liquidity, a clear need for all businesses, but it is always easy to distinguish products that are useful for that purpose. Factoring and advances on invoices may both seem valid solutions, but analysing how they work can enable you to choose the one that best suits your business needs.

Giorgio Lionello, Sales Manager of the Padua branch and of the Udine branch, answers the main questions on factoring and advances on invoices.

What are the differences between advances on invoices and factoring?

There are many differences between advances on invoices and factoring. First of all, the advance on invoices is a disinvestment of trade receivables, while factoring includes two other components in addition to the financial one: one is management and the other insurance (in the technical form of without recourse).

The management of receivables envisaged in factoring is the main difference with respect to the advance on invoices: by becoming the owner of the receivables assigned, the factor / Bank manages them as if they were in all respects its own receivables, in compliance with the statutory regulations governing the transfer of credits (Article 1260 of the Italian Civil Code) and Law 52 of 1991. It will therefore have to make contact with the debtor to manage collection and possibly any extensions and / or late payments. In fact, in factoring, financial reliability is relevant, but so is that of the debtor. This does not happen with advances on invoices where there is no trilateral relationship between transferor, factor and debtor; and the possibility of obtaining liquidity is strictly linked to the creditworthiness of the transferring company and the capacity of the credit line agreed with the Bank.

The insurance part is another big difference compared to the advance on invoices: in the non-recourse factoring solution the factor / bank insures the solvency of the assigned debtor. This is very important especially in certain economic stages and with companies that intend to transfer the receivables outright, thus freeing them from their balance sheets and consequently obtaining advantages related to the net financial position (NFP) and generally improving the credit system rating.

If I ask for factoring, am I required to transfer the entire turnover?

No, only the turnover expected from the assigned debtor or debtors.

If I have an active factoring relationship, am I obliged to transfer all the invoices of a specific customer to you?

When a factoring relationship starts, it is possible to establish:

  • Massive transfers of all receivables due from that debtor; in this case a transfer relationship is established through the LIR (Letter of Initiation of Relationship) which will last 24 months during which the transferor is required to transfer all invoices / credit notes regarding the assigned debtor;
  • The transfer of receivables relating to individual contracts with the debtor;
  • Spot transfers, i.e. only specific invoices without a LIR (Initiation Letter).

If the receivables are already insured with an insurance company, does factoring cost me less? Is the evaluation facilitated?

In order to evaluate a situation like this, the insurance contracts would always have to be signed by the customer, and the single case be assessed.

However, insurance companies generally insure all the turnover of a customer, applying shortage periods and deductibles and the cost is related to the entire annual turnover. On the other hand, in factoring one usually takes action on individual debtors by applying a commission without recourse on the turnover of that specific customer. It is difficult to evaluate in advance and on a theoretical case whether the cost of factoring may be lower or less seeing that the credit management component has a value that is added to the insurance benefits.

When evaluating the receivable, if it is already insured by the customer with its company, this will, in any case, be considered in the decisions; especially if there are giros of the policy rights, that is, if the insured customer endorses the rights and benefits of the policy to the factor which, at that point, operates with the debtor with an indirect guarantee provided by the insurance stipulated by the transferor.

Advertising message for promotional al purposes. For the contractual conditions of Factoring and Deferral of Payment of Trade Receivables, please refer to the information sheet available at our branches and in the Transparency section of the website