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Factoring is a financial operation where the supplier transfers or undertakes to transfer, for the compensation established in the factoring agreement, to a bank (factor) his/her monetary claims connected with the sale of goods, the performance of work, or the rendering of services to the buyer, and the bank (factor) remits or undertakes to remit, in exchange for the monetary claims, money to the supplier.
Sale operation involving participation of the bank (factor)
- The supplier sells goods or services to the buyer under the agreement made between the supplier and the buyer.
- The supplier submits one copy of invoice to the bank (factor).
- The bank remits factoring payoff to the supplier.
- At maturity of settlement of invoice, the buyer pays the bank an amount of invoice.
- The bank holds back interest and other fees under the factoring agreement out of the received amount and returns the reserve (balance) of the amount to the supplier.
Factoring scheme
Types of factoring
- Factoring with recourse - the supplier is responsible for the outstanding accounts of the buyer, i.e. it undertakes to take them over from the bank (factor).
- Factoring without recourse - the supplier, by delegating debts to the bank (factor), does not undertake to cover its possible losses if there is no discharge in accordance with the requirements, at maturity. In this case, the factor asks the supplier to insure the received commodity credit in an insurance company.
Factoring benefit for the seller
- Longer term of deferred payment;
- Increased purchasing power without other sources of finansing;
- Simplified settlement with the seller (fixed payment term and the established form).
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