Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is a very common method used by exporters to help accelerate their cash flow.
Types of Factoring
- Non-recourse factoring occurs when the accounts receivable are sold at an agreed upon price, and the factor assumes all of the risk for collecting the accounts. Non-recourse factoring is a more expensive form of factoring but the seller has no credit risk. Thus, if the invoice is not paid the seller has no obligation to pay the factoring firm back.
- With recourse factoring, the factoring firm does not guarantee the credit-worthiness of the client’s accounts, and the client sustains losses from any uncollected receivables. Recourse factoring is less expensive due the fact the credit risk stays with the seller but if the seller has strong, credit worthy clients, then this is the best factoring option.
Forfaiting is a means of financing exporters use that enables them to receive immediate cash by selling their medium- and long-term receivables — the amount an importer owes the exporter — at a discount
- “Principles & Practices of Banking”, Tata McGraw-Hill, New Delhi.
- wikipedia, investopedia