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There is quite a bit of confusion about factoring. Generally speaking, factoring is nothing but a marketing term used to describe different types of services, usually (but not always) provided by financial institutions.
Although all these services are different, each individual seller or factoring company, calls it ‘factoring’ and then specifies it as traditional factoring, invoice factoring, American factoring, reverse factoring, service factoring, bulk factoring, silent factoring, (non-)recourse factoring and perhaps a few more.
With this article, we hope to give you a clear (and final) understanding of the mechanisms at work with the different types of factoring and how to properly identify each service when you are looking around in the market.
Every type of factoring consists of 1 mainstream in combination with 1 or more basic elements. Different combinations make different types of factoring. There are two mainstreams:
A loan based on debtor portfolio, where all the invoices are pledged as collateral to the lender (factor) by the lendee. Generally speaking, this is called ‘factoring’ and is a service usually provided by banks. As this is a loan you need to pay back, the factoring company will charge you an annual interest rate.
The sale of one’s invoice to a purchasing party (factor), where the invoice rights (and obligations) are transferred and assigned to the purchaser. This is not a loan, you are merely selling a balance sheet asset to a third party (like stock or inventory). Hence, the factoring company will offer you a bid price per invoice. This is also called invoice factoring.
There are 4 basic elements. You need to take into account each one of them when you are applying for a quote with a factoring company.
The factor may or may not …
We purchase invoices, so American factoring. Regarding the basic elements, we register, manage, (partially) purchase, monitor, collect, and take over debtor risk. So technically we apply all four basic elements, although there are options to deviate from them if our client wishes to do so. This is called non-recourse American factoring. Non-recourse means there is no payback obligation. There are, of course, some rules each party has to oblige by.
You and your client negotiate a deal for you to deliver goods or services. It is up to you and your client to set the terms, such as:
We usually purchase 100% of your invoice including VAT and pay out that amount minus our factor fee straight into your bank account. In some cases, if the client wishes so, we can purchase a part of your invoice. The remainder will then be paid when the debtor settles the invoice. We call this direct and indirect payment. Either way, the whole invoice is assigned, and you only pay for the purchase of the direct payment amount.
For the following example, imagine a factor fee of 3% *. That will give us the following two calculation examples:
*our fee varies between 1 and 5% depending on several variables
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