Factoring, is the transaction that consists of the acquisition of credits, or accounts receivable, by a financial company which is called "factor". This activity benefits a business in two important ways: one, by advancing money in its accounts receivable, which means cash flow; and the other, as a collection system for the payment of said accounts. However, the actors that participate in these operations are various, and the scenarios are different, so let's analyze the types of factoring based on these elements.
Two types of Factoring: Factoring customers and suppliers
Customer factoring refers to when the seller generates a sale with his buyer and this sale issues an invoice receivable. The client (or in this case the seller) then assigns their accounts receivable to the factoring firm to obtain an advance of resources, usually 80% of the value of the invoice. Subsequently, the factor will charge the buyer after the stipulated period. Once the payment is received by the buyer, the factor makes the agreed charges to the customer (the seller) for the service, and to conclude, the deposit of the remainder to the customer (the seller).
Supplier factoring (reverse factoring) is the model where a buyer pays their supplier in advance through a factoring company. In this case, the factoring client is the buyer, who makes his purchases and goes with the factor to find liquidity with the seller. The supplier receives the payment of his account receivable from the factor, and finally, the buyer will pay the due date of the invoice to the factoring company within the established period.
Factoring according to who assumes the risk in case of payment default: Factoring "with recourse" and "without recourse"
“With” or “recourse” factoring makes up the bulk of the accounts receivable financing industry. It is based on the agreement between the client and his factor regarding the responsibility of the collection. In the event that the factor cannot collect the customer's account, the customer must cover the cost of said receivable invoice (or return the funds anticipated).
Factoring "without recourse" is the opposite case where the factor accepts greater risk with respect to the end customer not paying. This type of factoring is usually more expensive. Additionally, the “no recourse” agreement usually only applies to cases where the buyer gets into financial trouble (eg bankruptcy). In cases of commercial disputes (eg, the buyer did not accept the product due to defects), the seller must respond to the factor for non-payment.
For a company or business that is well established, but with a significant debt regarding its operation, factoring presents an improvement in flow without having to assume an extra debt. In the opposite case, a business with credit problems finds in factoring an option since the factor will not be based on the credit history of the direct customer, but on the ability to pay of those responsible for the accounts receivable.
Factoring according to who makes the collection: factoring of direct or delegated collection
In ** factoring by direct collection ** there is an assignment of the customer's credit rights to the factor on accounts receivable: The customer sells and generates the accounts; the rights of the same are transferred; the factor advances 80% of the account to the customer and notifies the debtor (buyer) of the acquisition of credit rights; upon maturity, the factor collects the total from the debtor, to finally deposit the remainder with the customer.
In ** factoring by delegated collection ** there is also an assignment of credit rights to the factor but it is the client who collects from the debtor: The client assigns the credit rights, the factor anticipates 80% of the account to the client Who is the one who collects the debtor, and once the payment is obtained, deposits the financed value to the factor.
Factoring according to the geography of the operation: Domestic or export factoring
In domestic or national factoring, the three parties involved (seller - buyer - factor) are located in the same country. The transaction is carried out internally, without the need for more figures in the operation.
On the other hand, in international factoring, the seller and the buyer are from different countries. This type of factoring is often valuable for exporters that require working capital to grow. In this model, the exporting company (seller) sells to an importing company (buyer); This exporter goes with his factor and obtains the advance payment of the international account receivable. The export factor manages the collection of the invoice and subsequently settles the remainder with the seller.
Regardless of the classification, when a company is faced with the need for factoring, it is best to approach the factor company to discuss terms, analyze possibilities and project risks, in order to squeeze the advantage that a factor can offer.