Common factoring arrangements

This article provides a brief overview of five common factoring arrangements. Many of these allow a company to outsource its accounts receivable posting, reporting, and collections to a factor to help keep the company’s staff and overhead low.

Non-recourse factoring

The factor provides the bookkeeping, accounts receivable posting, and the reporting and collection services. The factor may provide advances or loans against the purchased accounts receivable, inventory, or other assets. The factor assumes the credit risk of an account debtor’s inability to pay the outstanding accounts receivable.

Recourse factoring

The factor provides the bookkeeping, accounts receivable posting, and the reporting and collection services. However, similar to an asset-based lending situation, the factor does not assume credit risk of a customer’s inability to pay the outstanding accounts receivable. The risk is borne by the client.

Collection factoring

The factor provides the bookkeeping, accounts receivable posting, and the reporting and collection services. The factor does not offer loan or advance privileges. The factor assumes the credit risk of an account debtor’s inability to pay the outstanding accounts receivable.

Money or funds in use factoring

The factor provides the bookkeeping, accounts receivable posting, and the reporting and collection services. The factor does not offer advances and/or loans against the purchased accounts receivable, inventory, or other assets. This can be done on a recourse or non-recourse basis.

Non-notification factoring

The client is responsible for collecting the invoice payments from its own customers. Generally, the client is required to direct its customers to remit payment to the factor’s lockbox.

The company and its factor can work together to determine which arrangement both meets the factor’s requirements and helps the company achieve its business objectives.