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Factoring 101: Advanced settlement funding in Brazil

It can take a while to receive your funds in Brazil. Ensuring cash flow is critical to ensuring your business runs smoothly. Factoring is widely used in Brazil and allows you to receive settlements sooner. Receive funds the same day, or the next day - no more waiting months to be fully settled.

Factoring 101 – What is anticipation of receivables in Brazil?

The Wikipedia definition: ‘Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.’

The simple definition: Factoring results in advance settlement funding. In other words, you can receive the money you are owed in the future, in the present. The financial institution offering this service will collect the payment from the party who owes you when the accounts are due. This is a particularly useful service in markets where instalment payment plans are common.

Factoring in practice: Selling goods or services online in Brazil

In Brazil, settlement times are a lot longer than the global average. For example, if a consumer makes a purchase with a credit card1, it takes 30 days for you to receive payment for the good or service you have sold. Moreover, it is common for consumers to pay in instalments2. Consumers can choose a maximum of 12 instalments, payable each month in equal amounts. This means you could wait up to a maximum of 360 days before receiving the final payment.

With factoring or advance settlement, you can request to settle earlier - normally the same day or next day, for a fee.

Factoring/Anticipation Fee

Financial institutions charge a fee for this service. It is based on:

  • the interest rate, typically determined by how long it will take until the financial institution receives the full amount of money
  • an IOF (Imposto sobre Operações Financeiras) tax, a mandatory tax for this service
  • the discount rate, which is affected by the anticipated future value of the transaction

The financial institution will charge fees per invoice, per week or per month. Fees across providers range from 1-2% to up to 18%, depending on the number of instalments to be paid upfront.

Alternative ways of referring to factoring

You will hear factoring referred to in a number of different ways, but they all operate in the same way

  • Advance settlement funding
  • Anticipation of receivables
  • Anticipation of accounts receivables
  • Prepayment
  • Pre-financing
  • Trade receivables financing - a blanket term for exchanging liquid assets in anticipation of future money/receivables
  • Invoice factoring
  • Factoring receivables
  • Accounts receivable financing
  • Legal advance funding

*Factoring is not considered borrowing as it involves selling the account receivables. Therefore, factoring is not the same as invoice discounting (assignment of accounts receivable in Americawhich refers to borrowing using account receivable assets as collateral for a loan.

When is factoring recommended?

Factoring is a cash flow management strategy to turn unpaid invoices into working capital. It helps financial managers balance the money received from offering goods and services with money owed to employees, suppliers, the government, etc.

Here are some examples of when advance settlement may be recommended:

  • When a company has a sizeable invoice
  • Young companies who haven’t built up considerable cash flow or are waiting on many account receivables
  • Companies who have recently expanded into new markets and are covering the cost of expansion and set-up as well as normal business incomings and outgoings
  • Accounts that take 30 or more days to pay (for example, settlement times in Brazil)
  • Cash-strapped businesses needing to meet a payroll or take advantage of supplier discounts

What are the advantages of factoring?

  • Allows you to accommodate cash needs, e.g. new orders or contracts
  • Avoid debt accumulation
  • Overcome initial investment costs of starting up in a new market
  • Release working capital to reduce length of business cycles
  • Increase resource availability and improve negotiating power when talking with suppliers
  • Guarantee of final payment with fixed value. Normally it is the responsibility of the financial institution to pay the difference between end payment and anticipated payment, as laid out in the contract. This means that if the end consumer does not pay the full amount or if inflation dramatically increases, it does not affect your company, as you have already received the amount previously agreed

Advantages of factoring/advance settlement vs bank loan:

  • Less paperwork
  • One of the fastest sources of financing. Turn-around is either same day or next day
  • Cheaper
  • Lower debt risk. You receive your money earlier allowing you to use it to continue growing your business

Key things to consider

  • The fee for factoring should be lower than the cost of alternative ways of securing credit
  • Be aware of the real fee for advance settlement funding, including additional taxes like the IOF tax and the final fee for the invoice

Worldpay ensures factoring is a competitively priced option for your company, and will not charge anything other than the factoring fee agreed (i.e. no additional IOF tax fees not included in overall factoring fee).

Worldpay’s factoring offer

Worldpay’s factoring offer goes above and beyond the industry standard

 

Factoring diagram:

Without factoring

                                                                                                         

With factoring:

 Circle with 1-2 days from purchase with process flow around

Purchase + Factoring Request -> Worldpay** - > Acquiring Platform -> Customer's Bank -> Worldpay Sponsor Bank - > Merchant

**Worldpay will receive the full settlement 30 days later

 

[1] Credit cards are the most preferred online payment method, making up 60% of eCommerce payment value

[2] Instalments consist of paying for a product over a specified period of time in equal payments. In Brazil consumers can choose between 2-12 instalments, paid each month. Up to 80% of online transactions are paid in instalments in the travel industry

Interested in finding out more about factoring? Contact us or reach out to your relationship manager.