What is Confirming?

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By Evan Williams.

In recent years and more now in times of crisis, it is usual that cash tensions arise with our suppliers. Even so, we must not forget that this type of tension is something negative and is the only thing that makes our relationship with suppliers worse and lessens their confidence in us.

The confirming or factoring of suppliers, usually used by companies that deal daily with payments to many suppliers, avoids this type of problems and at the same time allows to save in expenses of administration of payments.

Resultado de imagen de confirming

What is factoring for suppliers?

The confirming is a payment management service to suppliers that financial entities offer. The majority of companies that hire these services agree to pay the payment terms in a long way on the invoice date. In addition, this system allows suppliers to have advance payment of their bills before the expiration date agreed with the company.

As expected, this service is not free. The companies pay for the contracting of the service and charge a small commission and an advance interest rate to the suppliers that wish to advance the payment of the invoices pending collection.

In this payment management system, three figures can be distinguished:

  1. Client: Also known as confirming issuer. Hire the financing entity to manage your payments with the suppliers. They are usually companies with a stable business volume that need to optimize and simplify payments to their suppliers.
  2. Financing entity: Financial services company that provides confirming services and will be responsible for managing the payment of outstanding invoices.
  3. Suppliers: It has invoices pending collection with the client and is the beneficiary of the confirming services.

A company accesses a financial institution and proceeds to open a line of credit against confirming.

Once the line of credit has been opened, the company will entrust the payment management of its suppliers to the financial institution and send the payment of the pending invoices with their suppliers so that once they are approved they are paid.

The financial institution will be responsible for sending a letter to the provider stating that the amount will have to be paid in his name. It also offers two options:

Wait until the due date of the invoice arrives and pay the financial entity seven days before it expires or anticipate the collection of the invoice in the conditions that have been agreed.

If it is decided to anticipate the payment:

The advance interest is agreed between the financial entity and the client.

The suppliers sign a contract-response in which they indicate if they want to anticipate the payment. In this contract they can determine if they want the advance of some or all of them.

The financial institution makes the payment by paying the cash by issuing a check or ordering a transfer.

If you decide to wait for the expiration date:

Once the due date arrives, the provider will receive the total payment of your invoice to your address.

Advantages and disadvantages

Advantages for the client

  • Savings in administration costs: The contracting of confirming services supposes a significant reduction of expenses in the administrative department.
  • Strengthens the relationship with our suppliers: By obtaining the payment immediately we get a better relationship.
  • Simplification of the payment system: Centralizes the numerous payment systems to various suppliers, grouping in this way due charges.
  • The payment initiative is maintained: In addition, a more efficient management of treasury needs is carried out.

Advantages for suppliers

  • Choice when to pay: the supplier can choose when and where the amount of the invoice is paid. You can choose between anticipating or waiting for the expiration date to arrive.
  • Simple and fast: financing system without the need of administrative procedures or studies of the financial situation.
  • Economical: avoid the cost of stamping and with advantageous advance conditions.
  • Outside unpaid: in case of confirming without recourse, the financial institution will be responsible for payment in case of default.
  • Reduction of the balance of pending accounts of collection: it improves problems of liquidity, solvency and treasury of the company.

Disadvantages for the client

  • More financial costs to anticipate: a confirming usually has more financial costs than a discount.
  • Losses of time and need for postal items: Financial institutions send payment letters by email.

Confirming is not accepted in international payment transactions or companies that are not from the euro zone.

Types of factoring

The types of confirming depend on who assumes the risk of non-payment of invoices:

  • Confirming with recourse: In this type of confirming, the risk of default by the debtor is assumed by the provider. If the financial institution anticipates the amount, the situation would resemble the financial discount.
  • Confirming without recourse: In this type of confirming, the risk of non-payment by the debtor is assumed by the financial entity. Whether it was decided to anticipate the payment of the invoice or wait for its expiration date, the financial institution can not demand from any of the parties that their money be returned and assume the risk of default.

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