There are various types of factoring based on variations in the different services and agreements between the business and the factor. Such different types of invoice factoring are recourse and non-recourse factoring, advance and maturity factoring, bank participation factoring, supplier guarantee factoring, disclosed and undisclosed factoring.
Types of Invoice Factoring
Recourse factoring means the credit risk of the customers of the business is assumed by the business only and not by the factor. Essentially, in this type of factoring the factor is only a financing and collecting agent for the business. Commission charges would have been higher if the factor would also have assumed the credit risk. Here, the charges would only include a component of interest on the money advanced and a service charge for collecting the money.
Under this type of factoring, unlike recourse factoring, the factor assumes the risk of customer credit. In a case of default by the customer, the business is not liable to pay anything. Of course, it charges a higher commission to the business for this additional service.
Read more about recourse and non-recourse factoring.
Advance factoring implies the payment of money in advance. As soon as the invoice is taken under factoring, the invoice amount less commission and the margin are paid to the business. The margin is paid post realization of the money from the customers. This margin ranges anywhere between 5% to 25%.
There are factoring services which offer the benefit of collection mainly. Maturity factoring is that kind of factoring where the invoice amount is paid after the realization from the customer. The job of a factor is to collect the money from the customer. Here, the charges of factoring would also be less as the component of interest would be dropped.
Also read Advance and Maturity Factoring for more details.
Bank Participation Factoring
This is a special arrangement whereby the margin of a factor is also financed by the bank. This is most suitable for the business for whom even the small margin of money is important. This kind of factoring arrangement allows the business to have complete finance of the account receivables and needs almost no money to conduct business.
It is the most popular form of factoring where the factor provides the client with all types of facilities like protection from bad debt, collection, etc.
Domestic and Cross-Border Factoring
Factor giving the services of purchase, management, funding, and collection of accounts receivable in the domestic territory is termed as domestic factoring. It involves three parties i.e. buyer, seller, and factor who are located in the same country. Whereas, if the same services are provided in international markets then it is termed cross-border factoring. It involves four parties i.e. exporter, importer, export factor, and import factor.
Suppliers Guarantee Factoring
This is another very innovative way of getting out of difficult business situations. In this type of factoring, the role of factor involves taking guarantee of the business. The factor guarantees the payment of the suppliers of the business. And, on the other side takes factors in the invoices of the business. Once the money realizes from the invoices, the factor first makes payment to the suppliers of the business. And, then the remaining portion of the business after cutting the necessary fee for the same.
Disclosed And Undisclosed Factoring
Disclosed factoring means the customer of the business is aware of the factoring arraignment of the business. On the contrary, in undisclosed factoring, the customer does not know about the factoring arrangement. The entrepreneur puts a stamp on the business indicating the payment to be made to the factor in place of the staff of the business.