The factoring scheme is quite simple. The supplier ships the goods to the buyer on a deferred payment basis and transfers the invoices to the factoring company. The factoring company, in turn, finances up to 95% of the delivery cost against the assignment of a monetary claim, transferring funds to the supplier’s account. The amount of financing may depend on the amount of the transaction, the amount of supplies, possible risks associated with the supplier’s work, etc. Then the buyer pays the cost of the supply to the factoring company. After that, the remaining amount is transferred by the factoring company to the supplier’s account. There are the following types of factoring, which differ depending on the geography of the parties’ presence and the terms of cooperation with the supplier.
Internal and external
If the parties to the sale and purchase agreement on the terms of deferred payments, as well as the factoring company, are located in the same country, then factoring is called internal factoring .
External (international) factoring is used when the supplier and the buyer are residents of different countries. When servicing such supplies, as a rule, an indirect scheme is used, that is, responsibilities are distributed between two factors. Thus, a factoring company in the seller’s country provides financing to the exporter, while a factor in the buyer’s country assumes credit risks and accounts receivable management.
With and without regression
In the case of recourse factoring , the factoring company, having not received money from the debtor, has the right, after a certain period, to demand this amount from the supplier. In such a situation, the liquidity risk (the risk of non-payment on time) is borne by the factoring company, and the supplier remains with the credit risk. Monetary claims in this type of factoring are, in fact, the provision of short-term financing. Under the terms of recourse, the supplier is given the opportunity to work on hidden factoring, that is, not to notify the debtor about the assignment of the rights of the monetary claim to the factor.
If we are talking about factoring services without recourse , then here the risk of non-payment on the part of debtors falls entirely on the factoring company. In this case, hidden factoring is not possible.
Open and closed
If the debtor is notified that a factoring company is also involved in the transaction, then this type of factoring is called open . In this case, the debtor transfers payments to the factor account, fulfilling its obligations under the supply agreement.
When closed factoring is used, the debtor is not notified of the existence of a factoring service agreement. He transfers payments to the supplier, who, in turn, forwards them to the factoring company.