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Factoring: Credit factoring explained
Although credit factoring is often completely assimilated with factoring - and debt factoring -, the concept has a few specificities.
Because this financing option involves the selling of outstanding invoices issued for sales on credit, it is especially suited for large retailers dealing with independent resellers. Let’s have a look into how this financing service works.
Factoring VS credit factoring VS debt factoring: a glossary
To many people in the finance business, all these terms are synonymous with the old, well-known factoring that has been discussed elsewhere in this guide.
While these three terms can be interchanged superficially, they do not quite relate to the same ideas when we get to the bottom of things.
Why credit factoring is not exactly the same as factoring...
- Factoring is usually known as the financial product with which a business can sell its outstanding invoice at a discount in exchange for immediate cash, after the goods or services have been delivered. The factor will take care of the sales ledger and debt collection process.
- As long as delayed payment terms, which are commonplace in today’s business landscape - invoices will be paid for 30, 60 or 90 days after the invoice has been issued - the business effectively gives credit to the buyer.
- But if the buyer explicitly purchases the goods on credit, for example, because this buyer is a reseller, specialised finance houses will evaluate the creditworthiness of the buyers to provide guaranties to businesses selling their goods. These “guaranty companies” naturally extended their service range to sell factoring to their clients, by way of convenience.
... and debt factoring
The difference with debt factoring is actually a question of perspective, as both terms relate to a facility used to fund the “credit gap” between the issuance of an invoice and its payment.
- Credit factoring relates to the credit provided following the invoicing of extended payment terms. The verb “factoring” relates to the providing of funds against that credit.
- Debt factoring relates to the debt of the customer to the business which is using factoring. “Factoring” means providing finance against that debt.
Benefits and target users
Credit factoring enjoys the known benefits of factoring, but additional bonuses make it especially interesting to specific target businesses.
This financing product offers the many benefits of factoring:
- Immediately available cash,
- Outsourced collections departments,
- Improved credit scores,
- Quick approval process
But the “credit” variant, as it is provided by expert “guaranty companies”, also offer top-notch insight into the market and potential clients’ trustworthiness.
... make credit factoring especially suited to the retail business
This last benefit is especially useful to manufacturers who need to rely on a large scattered network of independent retailers to sell their goods to the end customer.
When a manufacturer has to deal with dozens of independent retailers who buy their goods on credit, based on expected local demand, it is very difficult for the manufacturer to appraise the risk.
It’s the core business of these guaranty companies to evaluate this risk, thanks to their national and sometimes international network of informers and their databases, so credit factoring is just the icing on the cake.
Discover the buying guide for Factoring
Import finance: the solution to engage in international trade
Reverse factoring: when buyers take charge
Export finance: not just receivables finance, but trade finance
Liability for unpaid invoice and factoring: who’s eventually footing the bill?
Recourse factoring and non-recourse factoring: who ultimately has to pay the debt?
Evaluating the importance of a cash flow forecast
Debt factoring: advantages and disadvantages
How does confidential invoice discounting work?
Receivables finance, or how to turn the problem of unpaid invoices into immediate cash
Investigating business cash flow solutions
Spot factoring, an interesting alternate factoring scheme for SMEs
How are factoring companies regulated?
Invoice factoring: what requirements must be met?
Invoice payment terms - and how to have them abided by