Factoring is based on the concept of selling (and/or assigning) a business’s outstanding receivables (=sales invoices) to the Factor and receiving a set of trade related services which includes:
- Protection against bad debts
- Collection of receivables
- Receivables ledger administration
The Factor will offer assessments of the creditworthiness of the Buyers that the Seller is selling to. This service will be available to the Seller both on existing and potential Buyers and is a constant review service, helping the Seller to make informed real time decisions about offering credit. It also enables the Factor to ensure they can safely maximize the level of funding they provide to the Seller.
Where the credit cover is in place, the factoring is known as non-recourse factoring, and where it is not, it is called recourse factoring. Which version is used depends on the detailed circumstances of the Seller, its Buyers and the local market.
The Factor will include Sales Ledger Management and Collection services. These may be fully outsourced to the Factor or may be kept on house by the Seller depending on the particular product offered.
The Seller sells or assigns the outstanding receivables with payment terms for a payment equivalent to the value of the invoices less a fee for offering the service and a charge for the period the money is used. This means that instead of having to wait 30 or 60 days, or even longer for payment from their customers (the Buyers), the Seller can have access to their funds usually within 24 hours and often sooner. The Factor will then collect the invoice payment from the Buyer and recover their advance.
For an SME, the opportunity to outsource its collection activity and manage the ledgers can be a very valuable benefit. For larger companies with developed and dedicated accounts departments, the collection and ledger monitoring and management activity can more easily be kept in house.