Factoring – different types of factoring arrangements : Factoring has its recent origin in India after RBI constituted a high powered committee to examine the score for offering factoring services in the country in 1988. Committee submitted its recommendation to set up factoring subsidiaries in 1989. Following the announcement of the guidelines, the State Bank of India and Canara Bank have set-up their factoring subsidiaries – SBI Factors & Commercial Services Limited and Canbank Factors Limited. We recommend you to read our previous article on what is Factoring and its process. After reading this article you will be able to understand about different types of factoring arrangements between the client and factor.
Different Types of Factoring Arrangements
- Recourse Factoring
- Non Recourse Factoring
- Maturity Factoring
- Advance Factoring
- Invoice Discounting
- Full Factoring
- Bank Participation Factoring
- Domestic and Cross border Factoring
Recourse Factoring :
In this type of factoring, the factor has recourse to the client (seller of goods) if importer(buyer of goods) become insolvent. In other words, risk of account receivables purchased from client becoming bad is borne by client himself.
Non Recourse Factoring :
In this type of factoring, factor has no recourse to the client if the debt / account receivables purchased turns out be bad or irrecoverable. Factor can not claim the amount from the client. As factor bear the risk of non payment, commission charged for the services is higher than recourse type of factoring.
The additional commission charged by the factor for bearing the risk of insolvency / bad debts is called del credere commission.
Maturity Factoring :
No advance payment is made by the factor to client. Factor pay the client only after collection of account receivables/ debt or on a guaranteed payment date. The guaranteed payment date is usually fixed taking into account the previous ledger experience of the client and a period for slow collection after the due date of the invoice.
Advance Factoring :
Factor pay the advance varying between 75-85 percent of the value of receivables or invoice factored. The balance is paid upon collection or on the guaranteed payment date.
Invoice Discounting :
Under Invoice Factoring arrangement, factor makes prepayment to the client against the purchase of book debts and charges interest for the period spanning the date of pre payment to the date of collection. The sales ledger administration and collection are carried out by the client. The client provides the factor with periodical reports on the value of unpaid invoices and the ageing schedule of debts. This facility is usually kept confidential i.e., the customers (whose debts have been purchased by the factor) are not informed of the arrangement. Therefore, this arrangement is also referred as ‘Confidential Factoring’ or undisclosed factoring.
Full Factoring :
Also known as Conventional Factoring, it combines the features of both non recourse and advance factoring arrangement. Full factoring provides the entire spectrum of services – collection, credit protection, sales-ledger administration and short-term finance.
Bank participation factoring :
Under this arrangement, a bank participate in factoring by providing an advance to the client against the reserves maintained by the factor. For example, assume that a factor has advanced 80 percent of the value of factored receivables and the commercial bank provides an advance limited to 50 percent of the factor reserves. The client is required to fund only 10 percent of the investment in receivables, the balance 90 percent being provided by the factor and the commercial bank.
Domestic and Cross Border Factoring :
The basic difference in domestic and cross border factoring is on account of number of parties involved in factoring process.
In domestic factoring, three parties are involved – seller (client), Factor, Buyer
While in cross border or export factoring, four parties are involved in transaction – Exporter (Seller/client), Importer (buyer), Export Factor, Import Factor.
It is also known as Two Factor system of Factoring as there are two factors involved in the transaction.