This involves advance payment based on the purchase of receivables arising from real-estate, services or construction activities. This may or may not entail the bank or factor taking the risk of default and handling collection when due.
Factoring is usually done by banks, savings banks or specialised factoring companies. The other parties are the customer who sells the receivables and the debtors.
Factoring may be used as a source of finance by large companies or by small businesses that work with large companies and face very long payment periods.
If receivables are purchased and advances given “without guarantee” (“non-recourse factoring”) the factor acquires 100% of the invoice value (minus a percentage) without requiring any guarantee. The factor will therefore assume the risk of the debtor’s defaulting.
Factoring can also be performed “with guarantee” (“recourse factoring”), in which case invoices are acquired for a portion of their value without assuming the risk of the debtor’s defaulting. In this case the customer must give guarantees that will be exercised in the event of default by the debtor.
It is also possible to distinguish between domestic factoring, which involves receivables for sales within the country; export factoring when selling abroad, with payment secured by credit insurance; and import factoring securing credit granted by exporters in one country to importers in another as a complement to import factoring, and usually including collection management services and fund transfers to the exporter’s country.
Other forms of factoring may also be available to corporate customers, such as the global assignment of a firm’s accounts receivable with financial advances to suppliers and payment of salaries.