Factoring for improving receivables collection

Factoring is a financial service in which service provider (the Factor) purchases non-due receivables from the Supplier that has delivered to the Buyer some goods or performed some services. As a rule, the Factor is purchasing short-term receivables with maturity up to 180 days. The factoring fee depends on the credit rating of the Buyer, i.e. the risk of collection of receivables from him, and the cost of service, beside a factoring fee, includes the interest as well.

Factoring in essence represents the transfer of receivables, wherein the Supplier, the Customer and the Factor sign a Cession Agreement. In addition to that, the Supplier and the Factor sign the factoring contract, based on which the Factor immediately pays to the Supplier between 70% and 90% of the invoice amount, less the factoring fee. Once the Buyer pays his obligation, the Factor pays out to the Supplier the remainder up to the full amount of the invoice, net of interest.

It is important to know that there are two types of factoring – with recourse and non-recourse. Factoring with recourse means that the Factor, if he doesn’t collect money from the Buyer, claim a refund from the Supplier, while in the non-recourse factoring the risk of collection is entirely on the Factor. Consequently, the fee for the factoring without recourse is slightly higher.

Factoring is intended for entrepreneurs who want to improve their liquidity without getting a loan, thus maintaining their credit rating. Also, the use of factoring reduces the risk of collection. In fact, before accepting claims, the Factor thoroughly checks the credit rating of the Buyer, and alerts the Supplier in case of the increased risk of collection.