Factoring and confirming: similarities and differences

The emergence of new alternative financing mechanisms has shown that there is a world beyond bank loans. Today, any company in search of resources has a variety of alternatives at its disposal and can choose the one that suits it best. In this context, factoring and confirming are some preferred options for projects needing liquidity. But this not only benefits organizations, as savers themselves enjoy a much wider freedom of choice. In the past, their investment possibilities were more limited, but now they can use their wealth to finance various initiatives through various methods. In this scenario, one component is gaining formidable prominence and attracting both businesses and investors: ethics. As a result, more and more companies are making solid commitments to boost their communities or protect the environment. Likewise, the number of people who analyze the behavior of companies in these parameters before giving them financial support is growing steadily. In short, ethics is becoming one of the most highly valued criteria when making investment decisions. Mechanisms such as factoring and confirming allow ethical aspects to be incorporated into their operations, which has catapulted them in recent years. According to the Spanish Factoring Association, an institution whose birth dates back to 1988, both formulas moved a volume of money close to 200,000 million euros in 2021. And this translates into a growth of 9.38% over the previous year. But what are factoring and confirming, and how do they differ?

What is factoring?

Factoring is a financing method that provides liquidity to companies that need it most. These businesses assign the collection rights of their invoices to a factoring entity, which advances them that amount of money. In return, it receives a small interest, from which it will profit. This way, the company can collect debts from its customers in advance. This formula has gained much recognition and is already used by all banking firms. Having seen the growing social interest in this system, most have decided to incorporate it into their portfolio of services. However, sometimes it is not the banks that provide the capital, but the individual savers themselves who decide to finance invoices. This is how crowdfactoring came about. The popularity of factoring is steadily increasing, and AEF data is proof of this. Last year alone, it recorded an increase of 11.56%, moving more than 98,000 million euros, an all-time high.

Types of factoring

There is no single type of factoring. This is a flexible formula, so there are different categories depending on the scope of the operation, whether the debtor is notified and the actor who assumes the risk of non-payment.

• Domestic factoring: all the actors involved in the factoring operation are located within the same borders.
• International factoring: the firms entering the factoring agreement belong to different countries.
• Factoring with a notification: occurs when both parties inform the company's client that a factoring transaction has been initiated.
• Factoring without notification: the debtor in charge of paying the invoice is unaware that the investor and the business have entered into a factoring agreement.
• Factoring with recourse: if the customer does not transfer the amount due to the investor, the business must take over the debt.
• Factoring without recourse: if the customer cannot pay the invoice, the investor assumes the risk of non-payment and cannot demand the company to return the money.

What is confirming

When a business contracts a confirming service, it delegates the management of payments to its suppliers to an external financial institution. After sending a series of indications that guide it in this task, it becomes the firm's responsibility to communicate to the suppliers when they will collect the debt. The confirming entity offers them the possibility of advancing this collection in exchange for paying a small commission or interest, which would generate a profit. If the suppliers accept, despite waiving that percentage, they obtain liquidity at a time that may be crucial. If they do not accept the conditions, they will have to wait until the due date to receive the money, which will be paid in full. The decision is voluntary and entirely up to them; the firm merely raises this possibility. This alternative has many advantages for organizations. To begin with, it facilitates administrative tasks, which experts now manage, thus saving time and resources. At the same time, their brand image is improved since they appear to their suppliers as solvent firms. Being guaranteed by a financial institution also increases its credibility and reliability. In short, through confirming, an investor advances payments to suppliers on behalf of the business. But what happens if they do not agree and decide to wait? Then the interest on the transaction would be added to the interest already borne by the business itself. As with factoring, conventional banking firms are already joining this trend. As a result, the boom in this system is very similar. According to the AEF, confirming grew by 7.32 % last year, surpassing the 100,000 million euro barrier.

Types of confirming

Confirming is not a rigid mechanism either, but it adapts to the specific needs of those who contract it. Thus, there are different modalities:

• Confirming with recourse: if the business does not have the economic capacity to meet its debt, it is the financial entity responsible for the non-payment.
• Confirming without recourse: in this category, the firm offering the confirming service is exempted from any liability, and the company itself must respond to the supplier if it cannot settle the invoice.
• Simple or standard confirming occurs when the supplier chooses to wait for the due date, at which time the company pays the amount.
• Financed or investment confirming: the supplier chooses to receive the money in advance, so the financial institution advances the payment on behalf of the business.
• Financed payment or financing confirming: the company transfers the money to the confirming entity after the due date has passed, so it must pay the interest due for the delay.

The main differences between factoring and confirming

Before analyzing the differences between the two, it is important to know what they have in common. Both factoring and confirming are financing methods used by businesses, as they provide them with liquidity when it is most needed. In addition, both are characterized by the involvement of three actors: the company, the financial institution or investor and the customer or supplier. The main difference is that factoring covers the company's customers while confirming deals with suppliers. The former could be considered a collection service, and the latter a payment service. However, both make it possible to advance these formalities. The interest in factoring lies with the business, but the supplier may also share the interest in confirming. On the other hand, in factoring, it is the company itself that ensures that it receives the money, whereas in confirming, it is the supplier that is guaranteed payment. Both have experienced similar increases. Moreover, during the last decade, the growth of the two formulas has gone hand in hand, with very few notable differences. And the future looks good for both. In the first half of 2022 alone, the factoring and the confirming sector grew by 26.12% compared to the same period of the previous year. The volume of its transactions has already reached 117 billion euros and is on track to exceed an all-time high again by the end of the year. The distribution is very balanced: 59 billion corresponds to factoring, and 58 billion to confirming. This boom reflects the increase in the number of savers and projects seeking an alternative to the traditional financial system. The emergence of methods such as factoring and confirming not only responds to this demand from society but also contributes to improving equal opportunities. And alternative financing platforms such as Inversa, which connect people with sustainable initiatives, are key to promoting the real economy.