Factoring in contrast to the collateral represents creditor transmission to the factor the right to demand repayment of debt from the borrower. This right is sold to factor, which is usually represented by commercial bank, financial or specialized factoring company.
There are following types of factoring services in the world practice:
– The factor buys payment requirements of the creditor relative to the borrower;
– The factor provide a range of services to the creditor, which in addition to assignment of claims of debts include maintenance of accounting records, the analysis of information on the financial condition of the debtors, providing credit insurance, advertising, warehousing, transportation, consulting and legal services.
Three parties are involved in factoring transactions:
– Factoring company (or factoring department of the bank) – a specialized organization, which receives invoices from its customers (creditors, suppliers);
– The client (creditor, suppliers of goods);
– Borrower (enterprise) – goods consumer company.
Due to the fact that the factor assumes the entire risk of non-payment of accounts (bank or company), he pays the customer up to 80-90% of the total amount of accounts and other debts are in reserve, which will be refunded after the repayment of entire amount of the debt by the debtor-borrower .
The factor charge for operations on claiming the debt from the client (company or bank):
– Factoring commission. Its size depends on the amount of the debt (the bigger the sum is, the smaller may be the percentage), the degree of risk and the volume of work required.
– Interest on loans to the daily balance paid against the collected customer accounts. The percentage is charged from the date of issuance of the advance until the day of repayment.
Factoring operations are divided into domestic and international, public and private, with and without recourse, direct and indirect.
Factoring transactions are classified as internal, if the supplier, the buyer and the factor-company are located in the same country, and as international, if any of the three parties is located in another country.
Open (conventional) factoring is associated with supplier assignment of documents to the factor-company with mandatory notification of the debtors (payers) of participation in the calculation of the factoring company. Notification is performed by recording payment direction to the factor-account to the address of the factoring company.
Closed (confidential) factoring is characterized by the fact that the debtor is not informed about factor-firm debt demand. Tariff for confidential factoring service is higher than the amount of the payment for open factoring services.
Factoring obligation may be with recourse. Factoring company has the right to require the creditor (supplier) to compensate previously transferred amounts in case of failure of the borrower (payer) to meet its financial obligations to repay the loan or pay for the shipped goods.
Factoring without recourse: if the borrower (the payer) fails to fulfil its financial obligation within a specified period (usually 30 to 90 days) factoring company shall pay all the costs of collection of the debt to the creditor (supplier).
On the world market factoring operations became widespread: their volume is estimated in 260-270 billion. dollars per year.
Factoring agreement is a special case of the assignment of creditor’s rights to another person (the financial agent).
When transferring the rights of the usual, general civil assignment, the creditor is responsible only for the invalidity of inferior requirements, but not for its execution. In relation to the financial agent and the client, the question of who shall bear the risks associated with possible non-payment of debtors’ accounts is decided in the factoring agreement and is of fundamental importance for the client.