Types of Factoring
Factors take different forms, depending upon the type of specials features attached to them. Following are the important forms of factoring arrangements:
1. Domestic Factoring: Factoring that arises from transactions relating to domestic sales is known as Domestic Factoring‗. Domestic Factoring may be of three types, as described below.
2. Disclosed factoring: In the case of disclosed factoring‘ the name of the proposed actor is mentioned on the face of the invoice made out by the seller of goods. In this type of factoring, the payment has to be made by the buyer directly to the Factor named in the invoice. The arrangement for factoring may take the form of recourse‗, whereby the supplier may continue to bear the risk of non-payment by the buyer without passing it on to the Factor. In the case of nonrecourse factoring, Factor, assumes the risk of bad debt arising from non-payment.
3. Undisclosed factoring: Under undisclosed factoring‗, the name of the proposed Factor finds no mention on the invoice made out by the seller of goods. Although the controls of all monies remain with the Factory, the entire realization of the sales transaction is done in the name of the seller. This type of factoring is quite popular in the UK.
4. Discount factoring: Discount Factoring‘s a process where the Factor discounts the invoices of the seller at a pre-agreed credit limit with the institutions providing finance. Book debts and receivables serve as securities for obtaining financial accommodation.
5. Export Factoring: When the claims of an exporter are assigned to a banker or any financial institution, and financial assistance is obtained on the strength of export documents and guaranteed payments, it is called export factoring'. An important feature of this type of factoring is that the Factor bank is located in the country of the exporter. If the importer does not honor claims, exporter has to make payment to the Factor. The Factor-bank admits a usual advance of 50 to 75 percent of the export claims as advance. Export factoring is offered both as a re-course' and as a non-recourse' factoring.
6. Cross-border Factoring: Cross-border Factoring' involves the claims of an exporter which are assigned to a banker or any financial institution in the importers' country and financial assistance is obtained on the strength of the export documents and guaranteed payments. International factoring essentially works on a non-recourse factoring model. They handle exporter's overseas sales on credit terms. Complete protection is provided to the clients (exporter against bad debt loss on credit-approved sales. The Factors take requisite assistance and avail the facilities provided for export promotion by the exporting country. When once documentation is complete, and goods have been shipped, the Factor becomes the sole debtor to the exporter.
7. Full-service Factoring: Full-service factoring, also known as Old-line factoring, is a type of factoring whereby the Factor has no recourse to the seller in the event of the failure of the buyers to make prompt payment of their dues to the Factor, which might result from financial inability/ insolvency/bankruptcy of the buyer. It is a comprehensive form of factoring that combines the features of almost all factoring services, especially those of non-recourse and advance factoring.
8. With Recourse Factoring: The salient features of the type of factoring arrangement are as follows 1. The Factor has recourse to the client firm in the event of the book debts purchased becoming irrecoverable
2. The Factor assumes no credit risks associated with the receivables
3. If the consumer defaults in payment, the resulting bad debts loss shall be met by the firm
4. The Factor becomes entitled to recover dues from the amount paid in advance if the customer commits a default on maturity
5. The Factor charges the client for services rendered to the client, such as maintaining sales ledger, collecting customer‘s debt, etc.
9. Without Recourse Factoring: The salient features of this type of factoring are as follows : 1. No right with the Factor to have recourse to the client 2. The Factor bears the loss arising out of irrecoverable receivables 3. The Factor charges higher commission called del credere commission‗ as a compensation for the said loss 4. The Factor actively involves in the process of grant of credit and the extension of line of credit to the customers of the client
10. Advance and Maturity Factoring: The essential features of this type of factoring are as follows : 1. The Factor makes an advance payment in the range of 70 to 80 percent of the receivables factored and approved from the client, the balance amount being payable after collecting from customers 2. The Factor collects interest on the advance payment from the client 3. The Factor considers such conditions as the prevailing short-term rate, the financial standing of the client and the volume of turnover while determining the rate of interest
11. Bank Participation Factoring: It is variation of advance and maturity factoring. Under this type of factoring, the Factor arranges a part of the advance to the clients through the banker. The net Factor advance will be calculated as follows: (Factor Advance Percent x Bank Advance Percent)
12. Collection / Maturing Factoring: Under this type of factoring, the Factor makes no advancement of finance to the client. The Factor makes payment either on the guaranteed payment date or on the date of collection, the guaranteed payment date being fixed after taking into account the previous ledger experience of the client and the date of collection being reckoned after the due date of the invoice.