Main Product Types
By volume, Recourse Factoring is the most widespread and common form of domestic factoring available.
The Factor will purchase the invoices of the Seller, provide funds to the Seller against approved debts receivables and collect money from the Buyers as the debts fall due. The Factor assumes responsibility for the maintenance of the sales ledger by:
- chasing debtors
- sending regular statements of account
- allocating payments received against outstanding balances
- regularly reporting the movements on the sales ledger to their clients
With expertise in receivables management, the Factor can provide an extremely valuable service not available with the traditional bank overdraft. However, a Factor is not a debt collection agent, although many will have the ability to employ debt collectors if required. (The difference is that a debt collector is employed to collect a defaulted or impaired debt, the Factor manages live and good debts.)
Factoring arrangements are usually operated on a disclosed basis, so the Seller’s buyers are aware of the Factor’s involvement. A notice is placed on the Seller’s sales invoice instructing customers to make payment directly to the Factor. This is usually referred to as the Notice of Assignment.
Recourse factoring involves making a prepayment to the Seller at an agreed percentage (the prepayment percentage) for a pre-determined period. ‘Recourse’ means that while the Factor is the legal owner (and has the economic right to dispose of the receivable) he can re-sell the receivable back to the Seller. Accordingly, the Seller might consequently still be at risk should its customer become insolvent or cease to trade. It also means that the debt is funded for a pre-determined period, typically 90 days after due date of the receivable. If the invoice has not been paid at the end of this period, any prepayment may be withdrawn and repayment may be required from the Seller. This is typically deducted from the prepayment created by more recent invoicing or from Buyer payments received.
Sellers remain responsible for undertaking their own credit research and they choose which Buyers they will give credit terms to (and to what level) but this will typically be done with the advice and support of the Factor who will generally have access to credit information and can advise accordingly.
The Seller is also responsible to ensure that the invoice is payable in full; in the event of a dispute it will be liable to repay the factor the purchase price that has been received in advance.
In some “Recourse Factoring” Contracts, the Seller may have a Credit Insurance policy in place that protects against bad debts. In this situation, the benefit of the policy is then assigned to the Factor (who owns the insured receivables) who will use the credit insurance policy for its own risk monitoring. In this case the With Recourse Factoring + credit insurance mechanism is very similar for the Seller as the Non-recourse Factoring mechanism.