Factoring

This type of contract is established with a specialized credit institution called factor. It provides a combination of 3 services:

• payment guarantee of your invoices,
• collection management,
• receivables financement.

They allow to delegate customer risk management (your invoices are sold without recourse to the factor), to discount them in order to be paid upon issue (usually 80%) and to delegate the collection of your invoices to the factor.

In case of unpaid by the buyer, the risk is assumed by the factor which cannot request the payment back to the seller.

In the event of customer default and if the receivables were sold without recourse, the risk is assumed by the factor who will manager the case with the buyer. If they were sold with recourse, the factor come back to the seller and recovers the money paid in advance!

Factoring features

The type of factoring contract depends on what you wish to obtain from the factor:

• The only financing of your receivables: an assignment with recourse will be sufficient,
• Funding associated with a payment guarantee on your customers. Choose a contract assignment without recourse.

Advantages and disadvantages of the sale of receivables without recourse:

• The seller does not deal with the collection,
• In case of default, the factor assumes the financial consequences and can not turn against the seller,
• The operation is deconsolidating: the sold receivables are derecognized, which improves significantly the balance sheet. With the sale with recourse receivables remain on the balance sheet with an offsetting financial debt liabilities,
• The main disadvantage of the non-recourse sale is the cost that is higher than the sale with recourse.

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Without recourse factoring process

The factor buys cash your invoices on issue and deals with your customer to be paid directly.

Process: for each of your customers you ask for the outstanding amount guaranteed by the factor. It will be based on the creditworthiness analysis of your customer. Here lies the main disadvantage of this formula:

With the factor you delegate the credit risk management and collection of your invoices so you can achieve economies of scale (personnel expenses, bank charges) but you become dependent on the decisions of the factor which can often seem very (maybe too much) conservative.

The purpose of the factor is not to take risks but to be remunerated by cash advances it makes to you on your invoices. That means that you won’t be able to use the factoring with your risky customers where the risk of unpaid invoices is high.

The factor buys the receivables that present an acceptable risk. The risk of unpaid remains in the business for the weakest customers.