Forms of Factoring

Depending upon the features built into the factoring arrangements to cater to the varying needs of trade/clients, there can be different types of factoring. The collection of receivables and sales ledger administration is a common feature of practically all factoring transactions. Additional features are also included in some of these arrangements. The important forms of factoring arrangements are briefly discussed below.

Recourse and Non-recourse Factoring: Under a recourse factoring arrangement, the factor has recourse to the client (firm) if the debt purchased/receivable factored turns out to be irrecoverable. In other words, the factor does not assume credit risks associated with the receivables. If the customer defaults in payment, the client has to make good the loss incurred by the factor. The factor is entitled to recover from the client the amount paid in advance in case the customer does not pay on maturity. The factor charges the client for maintaining the sales ledger and debt collection services and also for the interest for the period on the amount drawn by the client.

The factor does not have the right of recourse in the case of non-recourse factoring. The loss arising out of irrecoverable receivables is borne by him, as a compensation for which he charges a higher commission. The additional fee charged by him as a premium for risk bearing is referred to as a del creder commission. He also actively associated with the process of grant of credit and the extension of line of credit to the customers of the client.

Advance and Maturity Factoring: The factor pays a pre-specified portion, ranging between three-fourths to nine-tenths, of the factored receivables in advance, the balance being paid upon collection / on the guaranteed payment date. A drawing limit, as pre-payment is made available by the factor to the client as soon as the factored debts are approved/the invoices are accounted for. The client has to pay interest (discount) on the advance/repayment between the date of such payment and the date of actual collection from the customers/or the guaranteed payment date, determined on the basis of the prevailing short term rate, the financial standing of the client and the volume of the turnover.

An extension of advance factoring is Bank Participation Factoring under which a bank provides an advance to the client to finance a part, say 50 per cent, of the factor reserve, i.e. the factored debt less advance given by the factor. Assuming 75 per cent advance by the factor and 50 per cent advance by the banks (12.5 per cent of the factored receivables), the factor and the bank between them makes a pre-payment of 87.5 per cent of the debt and the client’s share is only 12.5 per cent of the investment in receivables.

The maturing factoring is also known as Collection Factoring. Under such arrangements, the factor does not make a pre-payment to the client. The payment is made either on the guaranteed payment date or on the date of collection. The guaranteed payment date is generally fixed taking into account the previous ledger experience of the client and a period for slow collection after the due date of the invoice.

Full Factoring: This is most comprehensive form of factoring combining the features of almost all the factoring services specially those of non-recourse and advance factoring. It is also known as old line factoring. Full factoring provides the entire spectrum of services, namely, collection credit protection sales ledger administration and short term finance.

Disclosed and Undisclosed Factoring: In disclosed factoring the name of the factor is disclosed in the invoice by the supplier manufacturer of the goods asking the buyer to make payment to the factor. The supplier may continue to bear the risk of nonpayment by the buyer without passing it on to the factor. Generally, the factor assumes the risk under non-recourse arrangements. The limit within which the factor works as non-recourse is laid down in the agreement beyond which the dealings are done on a recourse basis.