Types of Factoring

Generally speaking, there are three types of factoring arrangements:

1. Discount/Advance Factoring with Notification: Funds are advanced to the client before the due date of the receivables. The advance of funds frequently occurs soon after the receivables are generated. The advance may be as much as 90% of the face value of the invoices that are factored. The remaining 10% that is held back is a cushion against customer claims or allowances.

Interest is charged by the factor in one of two ways. The interest is charged until the accounts receivables are collected or, until the average maturity date arrives. The notification requirement necessitates the client to place a stamp directing the customer to make payments to the factor.

2. Maturity Factoring with Notification: Funds advanced to the client are determined by a calculation of the average due date of a month’s sales. Again, with notification the client will place a stamp on its invoices directing the customer to make payments to the factor.

3. Non-Notification Factoring: A factoring arrangement without notification leaves the client to keep its own bookkeeping and collection responsibilities. In addition, there is no notification provided to its customers.

Non-recourse and Full Recourse

Within this context of factoring, there is also factoring on a recourse and non-recourse basis. Receivables purchased on a non-recourse basis, it is the factor that assumes the risk and therefore the loss on those receivables, should the account debtor become unable to pay the receivables.

A factoring arrangement on a full recourse basis, the factor retains the collection function of the receivables it has funded. But if the client’s customer fails to pay the invoice during the agreed upon repayment period, the factor will return the receivable to the client and will expect a refund of the advanced funds.