Factoring is a type of finance in which accounts receivables (invoices) are sold by the business to a third party to meet its short-term liquidity needs. It is a financial arrangement between the client (business) and the factor (financial institution). Under the transaction between client and factor, the latter would pay the amount due on the invoices after deducting its commission or fees. There are different types of factoring in Nova Scotia. This article highlights important forms of factoring arrangements.
When three parties to factoring in Nova Scotia – client, customer, and factor – reside in the same country, it is referred to as domestic factoring. In other words, factoring arising from the transactions related to domestic sales is called domestic factoring. Domestic factoring is further categorized into three types:
- Disclosed factoring: In disclosed factoring, the name of the factor is mentioned on the invoice drafted by the supplier of goods or services, asking the buyer to directly pay the factor.
- Undisclosed factoring: In undisclosed factoring, the name of the factor is not mentioned on the invoice drafted by the supplier of goods or services. In such a case, the sales ledger of the client is maintained by the factor, and debt is realized in the name of the firm. However, control of all monies remains in the hands of factors.
- Discount factoring: The seller’s invoices are discounted by the factor at a pre-agreed credit limit with the institutions providing finance.
In export factoring, also known as cross-border factoring, the claims of the exporter are assigned to the banker or any other financial institution, and financial assistance is obtained on the strength or validity of export documents, and also payment is guaranteed. A key feature of export factoring is that the factor bank is located in the exporter’s country.
Full-service or old-line factoring is a type of factoring arrangement whereby the factor has no recourse to the seller when a buyer fails to promptly pay their dues to the factor. It is a type of factoring arrangement that combines all features of all factoring services.
In recourse factoring, the factor recourse to the client in case book debts become irrecoverable. In simple words, if consumers default on the payments, then the firm will be responsible for meeting losses.
Some salient features of non-recourse factoring are: factor has no recourse to the client, the loss arising out of irrecoverable receivables is met by the factor, higher commission known as del credere commission is charged by the factor for the said loss, and the factor is actively involved in granting credit to the client’s customers.
Business sometimes resists factoring in Nova Scotia to meet their short-term liquidity needs. The main benefit of factoring is that there is no need for the firm to wait for two or more months and can address its liquidity needs by just approaching a factor (financial institution).