Getting out of the liquidity crisis thanks to factoring
Getting out of the liquidity crisis thanks to factoring
30 June 2020 - by: Eleonora Castagna

Getting out of the liquidity crisis thanks to factoring

After the lockdown phase, many companies need to face the immediate consequences of the suspension of activities. A simple answer to the lack of liquidity, due to difficulties in collecting payments, is the factoring mechanism, or the transfer of one's credit to a third party, which will make the payment in advance.

Factoring FERCAM
The Covid-19 emergency had a strong impact on global economies, causing critical operational issues and slowdowns in production. Small and medium-sized enterprises, in particular, found themselves facing important challenges in the coming weeks, dealing with the recovery phases following the period of decline or, in some cases, total suspension of activities. It is almost certain that most companies will in fact observe decreases in turnover this year, sometimes at a drastic level.

Among the immediate consequences of the restrictions, that were certainly indispensable for dealing with the pandemic, there is a general reduction in liquidity, due to widespread difficulties in collecting and fulfilling payments. Insolvencies inevitably affect the entire production chain, causing financial tensions and imbalances between the needs and resources that can be put in place.

Analyze and plan to overcome the crisis

The first step for companies facing a reduction in their cash flow is the development of an accurate overview of the liquidity situation (how much, where, which currencies ...). Thanks to this complete analytical framework, it will then be possible to draw up a plan to take improvement actions.

Many will opt for a cost cut, but it is necessary to be very cautious in making this type of decision, as the consequences could affect future activities in the long term and make it more difficult to exit the crisis. Instead, it will be necessary to seek the right balance between immediate results and effects on the future, to better prepare the company's tomorrow.

It is undoubtedly an opportunity to be creative and flexible, adapting the company’s offer, solutions and service methods where possible to address the changing needs of customers and the regulations for containing the infection. It is also possible to rely on ad hoc financial solutions and negotiate different payment times with your suppliers and creditors. 

Some workable ideas to increase your liquidity

  • Thoroughly inquire about the protective and support measures proposed by the government
  • Explore new business opportunities and potential new income streams 
  • Negotiate discounts and/or extended payment terms with suppliers 
  • Activate a form of financing and/or loan 
  • Get prepayments from customers
This last point may seem inapplicable, as it is likely that even client companies may find themselves in difficult economic conditions. And yet there is a solution aimed at the immediate collection of one's receivables, thanks to the support of a third party that provides for the purchase of the credit: this is factoring.

Factoring as a support to corporate liquidity

According to Assifact (Italian Association for Factoring) data, factoring companies move over € 250 billion per year in Italy, or 14% of GDP. According to the Association's estimates, approximately € 270 billion will be purchased in 2020 by banks and financial entrepreneurs who carry out factoring activities, which is equivalent to a further growth of 3-4%. 

Factoring is a working capital management tool, based on credit transfer (Law 21 February 1991, n° 52). It represents a timely response to the reduction of cash flows, or a solution aimed at the lack of liquidity of companies, which already in past years (for example in correspondence with the financial crisis of 2008) has proved to be a valid ally for recovery.

Above all, this is a method that allows the economic resources available to be increased very quickly, with bureaucratic management that is far less onerous than a request for bank financing. It can also be activated as a complement or alternative to other sources of financing which the company can access. 

How does factoring work?

The factoring mechanism is simple: the company, which has a commercial credit towards its supplier, transfers the credit to a third party, the factor. The factor therefore makes the payment of the invoices in advance, subsequently going to collect from the debtor. The most commonly used methods are "prosoluto", with which the factor assumes the entire risk of insolvency by the debtor, and "prosolvendo", with which the factor exercises the right to recover the credit on the client company.

The form of "reverse factoring" is also common, through which the debtor company proposes the transaction, so that the factor enters into a contract with all creditors and pays the balance of expenses in advance. The debtor company will thus be able to take advantage of a deferred payment.

With factoring, the company benefits from a modular specialized consultancy service, entrusting the management and control of its credit portfolio to experts. The disbursement of funds takes place quickly and safely, with immediate optimization of the programming of receipts.

FERCAM offers a factoring service dedicated to its suppliers

Thanks to FERCAM Factor, a company of the Group, FERCAM also offers this service to its suppliers, in the forms “prosoluto” and “prosolvendo”. We thus offer our partners an immediate financing opportunity, potentially very relevant to overcome this delicate moment.

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