Factoring can be done on both a recourse and non-recourse basis. In developed financial markets, factoring
is done on a non-recourse basis. The factor does not have a claim against its client (the borrower) if the
accounts default. In less-mature financial markets, recourse factoring is used, where the factor has a claim
against its borrower for deficiencies of purchased receivables. Therefore, the factor would suffer a loss only
if the underlying accounts are not paid, while, at the same time, the borrower cannot cover the deficiency.
In recourse factoring, all the debts are at the client’s risk in the event of customer failure. The factoring
company is taking little risk. In these cases, one might expect that the factor would not be restrictive as to
whom the company is selling the product. However, factors impose credit risks and concentration limits that
restrict the funding of their clients. This is also an important aspect of risk management on the part of factors.
Factoring can be also be done on a notification and a non-notification basis. Under notification, the debtors
are notified that their payables have been sold to a factor. In general, factoring with recourse does not
include notification, but factoring without recourse does. (In many countries, factoring has a negative
connotation, so some clients prefer factors that do not notify their debtors.)
In reality, a factor provides three linked services: financing, assuming credit risk, and a collection service.
The collection service involves collecting current accounts, and the collecting of non-performing accounts.
This helps to minimize losses associated with bad debts to the client.Factoring and Invoice Discounting: Working Capital Management Options 2 of 5
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Factors typically pay less than 100% of the face value of receivables, even though they take ownership of
the whole amount. The difference between those amounts creates a reserve held by the factor. This reserve
will be used to cover deficiencies in the payment of invoices.
In world trade, factorable products often flow from developing countries to developed countries. This creates
opportunities for export factoring. Export factoring is the principal type of factoring in most developing
and transitional countries because it is, in many cases, easier and safer to factor export receivables than
domestic receivables. Obviously, in these cases, all parties to the tr
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