Different types of factoring can be used by businesses willing to secure near-instant cash in exchange for unsettled invoices for goods or services sold to their customers.
One of the most common types of factoring is factoring proper.
Businesses actually sell their invoices to the factor, who releases funds for up to a certain proportion of the amount of the invoice value - typically 80 to 90%, sometimes more - as soon as the invoices are submitted to the factor, and the remainder after the invoices have actually been settled. Sales ledger is transferred to the factor, as well as the responsibility to handle debt collection operations.
This family includes:
- Recourse factoring: the business remains liable to pay back the funds received in exchange for invoices which end up unpaid;
- Non-recourse factoring: liability for unpaid invoices is transferred to the factor;
- Undisclosed or confidential factoring: the customer never learns that a third party is involved in the arrangement.
Invoice discounting is the second of the two main types of factoring.
Businesses receive an advance payment from the invoice discounter, worth a certain proportion of the invoiced amount, and pay back this amount after the invoice has actually been paid by the customer. The business remains in control of his sales ledger and debt collection operations.
This family includes:
- Recourse invoice discounting: the business remains liable to pay back the funds received in exchange for invoices which end up unpaid;
- Non-recourse invoice discounting: the arrangement is protected by a bad debt protection which works like an insurance on the funds released in case of non-payment by the customer.
- Undisclosed or confidential invoice discounting: the customer never learns that a third party is involved in the arrangement.
An additional question: Respond to this Question
- How can factoring help my business improve cash flow?
- What are the requirements for factoring?
- Can I pick and choose which invoices are factored?
- How does a factor determine which invoices to accept?
- What's the difference between factoring and invoice discounting?
- What does a typical factoring contract contain?
- How much cash will I get up front for my invoices?
- What is reverse factoring?