Factoring is typically a framework agreement between the factoring company and the company selling deferred accounts receivable that covers the following:
The factoring company
- purchases a company's accounts receivable or other claims and pays the seller immediately, or via initial instalment (advance) and payment of the remaining amount (rebate) once the customer has paid the invoice in full,
- records and manages receivables,
- collects payment on the receivables and performs recovery activities as specified in the factoring agreement,
- provides protection against the payment delays and defaults of the debtors.
A significant percentage, usually 80% of the exporter’s short-term domestic or foreign accounts receivable is paid by the factoring company upfront. This financing option may be particularly useful for SME suppliers with limited financial resources as they receive money immediately instead of the usual 30, 60 or 90 day payment periods. Thus, the current assets financing of enterprises using factoring significantly improves, the production or service process can be relaunched with the help of the cash received from the factoring company and the factor that buys the receivables will effectively take over the debt collection process on its behalf to receive the money that is owed to them.
In the case of factoring, the buyer (debtor) or their future payment capacity pose a risk for the factor. This is the reason why the assessment of buyers, creditworthiness analyses of the receivables, the length of deferred payment and the amount of the own resources of the exporter all play a crucial role in the process and pricing of factoring.
The factoring service offered by EXIM means forfaiting, i.e. the purchase, without recourse, of bank-guaranteed receivables from export sales, transforming a deferred-payment transaction into a prompt-payment one, and thus relieving the exporter from the commercial, country (political and transfer), exchange rate, and collection risks arising from the receivable.