The main difference between bank credit and factoring as trade finance tools lies in the way they are accounted for. Bank loans appear on the books as financial liabilities whereas factoring only results in activity on the asset side. In other words factoring reduces your receivables while making your balance sheet more liquid. What's more if the factoring transaction takes place on a non-recourse basis, it can even go completely off balance sheet.
Only corporate entities (companies) may use factoring services to finance their domestic and international sales. Private individuals cannot use factoring.
Prepayments in factoring are made by the factoring company on the basis of the receivables that are assigned to it. The usual rate is 80% of the assignment.
Sales made on an open account basis may be assigned to a factoring company by means of a factoring agreement and a letter of assignment.
Receivables should have terms of between 30 and 120 days.
There will be an upper limit on financing that the factoring company will determine on the basis of its assessment of the quality of the receivables that are to be assigned to it. There is no lower limit.
Yes. Factoring companies can also provide collection and/or guarantee services without financing.
By law, receivables that are assigned to a factoring company must be based on an invoice or similar document. In other words, an invoice is absolutely required.
In non-recourse factoring, the factoring company assumes the risk for non-payment of the receivables assigned to it and it has no recourse against the seller in the event of non-payment unless the goods were defective.
In recourse factoring, the factoring company does not assume the risk for non-payment of the receivables assigned to it. This means that if the buyer fails to make payment, the factoring company has the right to recover from the seller any prepayments that it made.
Domestic factoring transactions are exempt from the Resource Utilization Support Fund excise but are subject to 5% banking and insurance transaction tax. Factoring agreements are exempt from stamp duty. Export factoring transactions are exempt from all taxes, duties, and charges.
Only credit and cash against goods sales qualify for export factoring services. The sales must also be made through a correspondent factoring company in the other country.
Yes. So long as the agreement between you and the factoring company remains in effect, all the sales you make to buyers that have been approved by the factoring company can take advantage of factoring services.
While your buyers may not be aware of the transaction during the credit investigation stage, at the time you assign your receivables, you must give the factoring company a letter from the buyer acknowledging and consenting to the assignment. In other words the transaction does not go forward without the buyer's knowledge.