Factoring & Business Loans

Factoring

Nationwide Factoring
  1. Factoring Programs
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  3. Construction Factoring
  4. Factoring Definition
  5. FAQ
  6. Factoring Fees
  7. Government Factoring
  8. International Trade Factoring
  9. International Factoring
  10. Merchant FAQ
  11. Merchant Factoring
  12. Purchase Order Factoring
  13. Example Solutions
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Business Loans

Factoring: Factoring could be understood as account receivable financing. It is a type of commercial finance whereby an entity sells its accounts receivable at a discount. The actual payment from their customers takes place on typical 30 to 90 days terms. Entities benefit from the acceleration of cash flow by obtaining cash from the factor equal to the face value of the sold account receivable, less a factor's fee. There are usually three parties involved when an invoice is factored: Seller, Debtor and Factor.

Seller: Seller of the product or service who originates the invoice.

Debtor: Debtor is the customer of the Seller, the recipient of the invoice for products supplied or services
rendered who promises to pay the balance within the agreed payment terms.

Factor: Factor is the factoring company.

Types of Factoring:

  • Notified (full service factoring): With notified factoring, the debtors are aware of the factoring as there will be a notice of assignment contained on each invoice and the factoring company normally does the credit control, that is, collects the outstanding debts.

  • Confidential (invoice finance): With invoice finance (confidential or non-notification factoring), the factoring is undisclosed, with the seller usually retaining the credit control function.

  • Recourse Factoring: Recourse factoring is the most common type of factoring transaction. It allows the factor to go back to the seller if payment is not received after a 90 day period. The credit risk does not transfer to the factor during the recourse factoring process. In the event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is the lowest cost for the seller because the risk for the factor on the funding transaction is lower.

  • Non Recourse Factoring: Non recourse factoring is the traditional method of factoring and puts the risk of non-payment fully on the factor. If the debtor can not pay the invoice the factor cannot  seek payment from the seller. The factor will  only purchase solid credit worthy invoices and he will turn away average credit quality customers. The cost is typically higher with this type of factoring as the factor assumes a greater risk.