Receivable Factoring
- Accounts receivable (A/R) factoring, often referred to as invoice discounting, is a type of short-term financing used by some business borrowers. The transaction takes place between a business (the Seller) and a Factor.
Factoring is only available as a funding source for companies that sell on credit terms, meaning that a borrower (the vendor) sells a good (or service), generating an invoice to its buyer for payment at a later date (terms may be 30, 45, or 60+ days).
Factoring can be a source of “non debt” financing when it is done on a without recourse basis. Factoring is linked to receivables and sales. It cannot be used for funding inventory.
Dealers
- Collateral free working capital solution.
- Accessing wider network of investors can reduce pricing.
Anchors
- Balance sheet management by early realisation of receivables.
- Off balance sheet funding helps reduce bank debt.
- Risk management of lower rated debtors.
Lenders
- End use is known – to pay the Anchor.
- Past history is available and hence limits are based on experience.
- Portfolio effect – the loans are spread over many borrowers. First loss guarantees can improve this further.