A company’s receivable balance represents the money owed by its customers, in other words its debtors. These receivables may take some time before turning into available operating capital, which means many businesses resort to various banking products to reduce payment delays, collect debt and generally smooth out their cash flow. Factoring is generally the preferred choice of SMEs and start-ups, as it is a simple way to fund development, however larger companies will benefit from using securitisation, as it isolates them from the risk of non-payment.
Factoring means that a company, referred to as the borrower, sells its receivables to a third party factor, usually at a significant discount. The factor pays up to 90% of the receivables to the borrower, and is thereafter responsible for collecting the debt, thus assuming the risk of non-payment. The older the receivables, the more likely they are to remain unpaid. Therefore, the higher the discount conceded by the borrower.
Securitisation, however, guarantees that a company will receive all the money owed by its customers, even if these customers fail to pay. As a matter of fact, a company’s receivables can be transformed into short-term securities which are then sold to investors for less than their face value to make a return on investment possible. The business gets its money straightaway, and when the customers finally pay, the investors get their own money back. If, among the outstanding receivables, a part of the debt is not collected, this risk is assumed by the investors, not the company which issued the securities. Therefore, securitisation is better suited to large companies which process large amounts of receivables.
An additional question: Respond to this Question
- Why turn to a factor rather than seek a bank loan?
- How does a factoring finance arrangement work?
- Who collects the debt due, the factor or my business?
- What's the difference between factoring with recourse and factoring without recourse?
- Does factoring require a minimum number of invoices?
- What does a factoring company do in the case of nonpayment?
- Do my customers know of the factor’s involvement?
- What are the requirements for invoice discounting?
- Is there any collateral requirement for factoring?
- How quickly can I access cash for the invoices I sell to a factor?
- Who do I turn to if I have a dispute with my factoring company?
- I have overseas clients; can I factor international invoices?
- Is it easy to terminate a factoring arrangement?
- What regulations apply to factoring companies?
- What does working capital mean to your business?
- What is the difference between factoring and bill discounting?
- What is credit insurance?
- What is export factoring?
- What is the difference between invoice factoring and merchant cash advance?