Factoring plays the role of the financial service that is provided by a specialized company or bank. Its essence lies in the sale of goods with deferred payment, further assignment of monetary claims to pay for supplies and funds from the company-factor. Such a mechanism is beneficial to all parties of the transaction:
- seller – because he has the ability to increase sales and almost immediately get needed funds;
- intermediator – because it can earn a commission for factoring services and discounts between the value of the goods and payment for the transfer of monetary claims;
- buyer – contractual obligations toward him are made in full volume and in due time (he is provided with uninterrupted supply).
There are several types of this financial service, and the most common is factoring with and without recourse.
The mechanism of recourse factoring
The distinguishing feature of this factoring is seller’s liability for non-payment ability of his buyer. In other words, when the debtor refuses to pay the debt, the obligation to compensate credit funds provided by the factors goes back to the client.
Agreements of recourse factoring usually involve the provision of the following services:
- Financing payments for supplies “day to day”.
- Insurance of risks of delinquency and defaults during the grace period of 1-4 months.
- Accounting of the debt state and negotiating with debtors in order to repay the debts.
Features non-recourse factoring
This is pure classic factoring, when the client receives from the factor necessary funding and protection from insolvent or unscrupulous buyers. The clint can get all the range of financial services in accordance with the signed agreement of non-recourse factoring:
- Financing of commodity supplies in the amount of 85-90% of the invoice amount.
- 100% risks insurance.
- Account receivables, monitoring of delinquencies and work with the buyer in order to repay the debt.
Characteristics of reverse factoring
In this type of factoring, sometimes referred to as procurement factoring, the factor repurchase accounts receivable from his customer, paying the 100% of the price. At the end of the installments period, the buyer returns the value of the funded delivery. Reverse factoring – is a great option for the supplier, as it allows to get the nominal value of the supply, accelerates turnover and eliminates the risk of non-payment.