Factoring represents the sale of outstanding receivables related to export of goods by the

exporter to overseas buyers. The seller of the receivables thus transfers the risk of default on
contractual obligations arising from nonpayment by the buyer to a third party. The seller of the
receivables is paid discounted value of the receivables, arising either from a letter of credit,
guarantee or bill. Factoring is possible with recourse or without recourse.
The advantages enjoyed by an exporter due to such financing are immediate payment after
export. The exporter can enjoy financial benefit, in the case of without recourse, at no risks
arising from the deal after factoring.
Factoring is a financial transaction and a type of debtor finance in which a business sells its
accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A Business will
sometimes Factor its Receivable Assets to meet its present and immediate Cash needs.
There are three parties directly involved: the factor who purchases the receivable, the one who
sells the receivable, and the debtor who has a Financial Liability that requires him/her to make a
payment to the owner of the invoice.[2][3] The receivable, usually associated with an invoice for
work performed or goods sold, is essentially a financial asset that gives the owner of the
receivable the legal right collect money from the debtor whose Financial Liability directly
corresponds to the receivable asset.
The seller sells the receivables at a discount to the third party, the specialized financial
organization (aka the factor) to obtain cash.
The sale of the receivable transfers ownership of the receivable to the factor, indicating the factor
obtains all of the rights associated with the receivables.[2][3] Accordingly, the receivable
becomes the factor's asset, and the factor obtains the right to receive the payments made by the
debtor for the invoice amount.
A factor is a bank or a specialized financial firm that performs financing through the purchase of
invoices or accounts receivable.
If the factoring transfers the receivable "without recourse", the factor (purchaser of the
receivable) must bear the loss if the account debtor does not pay the invoice amount. If the
factoring transfers the receivable "with recourse", the factor has the right to collect the unpaid
invoice amount from the transferor (seller).
Thus, by virtually eliminating the risk of nonpayment by foreign buyers, factoring allows the
exporter to offer open accounts, improves liquidity position, and boosts competitiveness in the
global marketplace. Factoring foreign accounts receivables can be a viable alternative to export
credit insurance, long-term bank financing, expensive short-term bridge loans or other types of
borrowing that will create debt on the balance sheet.
FACTORING MECHANISM
1. Seller raises an invoice on buyer, with instructions to pay the factor directly, and sends it to
the customer.

2. Seller sends a copy of the invoice to the factor.

When an invoice is not paid on the due date the liability will depend on the type of agreement,
for example whether it is with recourse or without recourse to the seller.
RECOURSE AND NON-RECOURSE FACTORING FACILITIES
When you make use of an invoice factoring company it is very important to be aware of who is
responsible for debts which occur when customers fail to pay.
If you have a recourse factoring facility then the factor will not take the risk of the debt on, they
will just collect the money from you if an invoice goes unpaid.
RECOURSE FACTORING FACILITIES
This is a lower cost form of factoring because you continue to take the risk of bad debt rather
than the factoring company. This type of factoring is also easier to attain, the invoice factor will
tend to have less stringent rules about your business systems and the payment history of your
customers.
Once the invoice is returned to you, you are responsible for collection. If you are unable to do
this then you can contact us and make use of our recourse collection service (see UK commercial
debt recovery and international debt collection).
NON-RECOURSE FACTORING FACILITIES

With non-recourse factoring the factor assumes responsibility for all bad debts. This means that
if a customer does not pay an invoice, either through insolvency or protracted default, you do not
have to pay back the amount advanced to you by the factor.
The factor legally takes ownership of the debt and as a result this type of facility attracts higher
fees as the factor is increasing their level of risk.
Non-recourse factoring facilities are difficult to obtain if you have weak financial systems or
numerous customers with bad payment histories as strict credit limits will be set for your
customers.
It is important to choose the correct type of factoring for the current state of your business, but
equally important is choosing the right invoice factoring company to deal with. There are some
factors in the market who offer lower levels of customer service, even if they charge low fees
this lack of service could end up costing you more in the long run.
MATURITY FACTORING arrangement whereby the factor, who performs the entire credit
and collection function, remits to the seller for the receivables sold each month on the average
due date of the factored receivables. The factor's commission on this kind of arrangement ranges
from 0.75% to 2%, depending on the bad debt risk and the handling costs.
Difference between Forfaiting and factoring
Forfaiting and factoring are two ways of financing exports of international goods through
accounts receivables collection, distinguishable from each other by the type of export goods
involved and the length of time the importer has to pay. Factoring deals with the sale of an
exporter's accounts receivable on ordinary goods with the balance of payment terms due upon
delivery or shortly thereafter. Forfaiting also deals with the sale of an exporter's accounts
receivable but only in regard to capital goods, commodities or other high-value export
transactions and when the importer's period to complete payment is at least six months.
Although involving the same basic process, forfaiting and factoring differ in subject matter.
Factoring is the term used for ordinary trade goods with payment expected immediately upon
delivery. Forfaiting is the term used for the financing of accounts receivable for capital goods,
commodities, or other high-value bulk merchandise. These types of transactions have longer
payment windows, so forfaiting can involve the extension of credit for payment terms anywhere
from six months to seven years.
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