Factoring – New Kid on the Block

What is Factoring? Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable. FCI is the global representative body for Factoring and Receivables Finance Industry. FCI has two main…

What is Factoring?

Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable.

FCI is the global representative body for Factoring and Receivables Finance Industry. FCI has two main activities and value propositions:

  • FCI facilitates and promotes International Factoring through a Correspondent Factoring platform.
  • FCI is the Global Industry Association for Open Account Receivables Finance

How does it work?

Customer makes a sale, deliver the product or service to a buyer and generates an invoice. The factor (Financial Institution), then, buys the right to collect on that invoice from that pre-agreed buyer and pays usually 80% -90% of the invoice value to the customer. This payment to the customer is made as early as the next business day on receipt of such documents.

What are the required documents?

Apart from documents required for Factoring Limit assessment, which are similar to loan appraisal documents, following documents are required at the time of factoring-

  1. Lorry Receipt / Air Waybill / Bill of Lading (B / L) with Certificate of Origin
  2. Packing List
  3. Invoice
  4. Bill of exchange

What is the Cost?

Typically, a one-time processing fee and an interest charge is levied for a factoring transaction. Sometimes, a service fee is also levied which is calculated as a percentage of the value of the invoices factored.

What are different types of Factoring?

  • Disclosed – Buyers' are notified of the factoring agreement.
  • Undisclosed – Buyers' are not informed of the factoring arrangement. Customer (You have) has to pay the amount to the factor irrespective of whether customer has paid or not.
  • Recourse – Customer (You collect) collects the debts from the Buyer. If the buyer does not pay the amount when due, factor will recover the amount from the Customer (You).
  • Non-recourse – Factor undertakings to collect the debts from the Buyer. Balance amount is paid to customer on due date or when the buyer pays the factor which is earlier.

Advantages over Conventional Source of Working Capital Funding

  • Collateral security usually not required.
  • Value added services in the form of sales ledger administration, collection & credit protection, Possibility of outsourcing your receivables collections process, allowing you to focus on core competencies.
  • Customer's (Your) “limits” grows as your business expends.
  • Factors provide free back office support, including managing collections from your customers. This gives you more time and resources to focus on growing your company. Factoring is based on the quality of your customers' credit, not your own credit or business history.