1. Definition

Factoring is a financial arrangement where a company sells its receivables from goods or services to a specialized provider known as a factor. In return, the company immediately receives liquidity, typically 80-90% of the invoice amount. The factor often manages the receivables, including dunning processes and assuming the risk of non-payment. Factoring is particularly popular among businesses aiming to improve liquidity or mitigate the risk of bad debts.

2. Applications

Factoring is utilized across various economic contexts:

• Small and Medium-Sized Enterprises (SMEs): SMEs often use factoring to overcome financial constraints and support growth.
• Large Enterprises: For larger companies, factoring serves as a tool for balance sheet optimization or protection against payment defaults.
• Export Trade: In international business, factoring minimizes currency risks and ensures payments from overseas clients.
• Service Sector: Service providers benefit from factoring by gaining quicker access to their revenue streams.

Factoring provides advantages such as improved cash flow, reduced administrative burden, and the ability to focus on core operations.

3. Types of Factoring

There are several forms of factoring, differentiated by their structure and risk transfer:

1. Recourse Factoring:

   • The factor assumes full responsibility for bad debt risk.
   • This is ideal for businesses seeking protection against non-payment.

2. Non-Recourse Factoring:

   • The company remains liable for unpaid debts.
   • This option is usually more cost-effective than recourse factoring.

3. Inhouse Factoring:

   • The company retains responsibility for managing receivables while the factor provides funding.

4. Full-Service Factoring:

   • The factor handles financing, bookkeeping, dunning, and collection processes.

5. Reverse Factoring:

   • Initiated by the debtor to enable early payments to suppliers.

Factoring offers businesses a flexible solution to ensure financial stability, drive growth, and reduce the risks associated with unpaid invoices.