What Are the Different Kinds of Factoring?

Factoring refers to a financial agreement between the client and the factor in which receivables from a client produce returns from a factor and give the client advances. For instance, factoring in Alberta sells companies’ receivables to help them sort out their urgent financial needs, and they, in return, receive returns from their clients.

Various types of factoring exist globally, though not every factoring company provides these services. Below is a summary of all of them to give you a clear picture of how they operate.

Recourse Factoring

Recourse factoring is the most popular factoring in Alberta. In this type of factoring, the responsibility of making the entire factoring falls on you since your client has no reason to pay for the factored invoices.

This aspect means you must ensure you pay back the factor for the factoring discount and the cash you received in advance. For this service, there is zero debt protection, and you must ensure only the reliable clients who are going to pay for the invoices get the invoices.

They frequently made these payments from the money received from debtors, though you can also replace the unpaid ones from the new invoices provided since the factor in your account may sometimes be reserved.

Non-Recourse Factoring

 In this type of factoring, you don’t have to pay for the entire factoring where your client cannot deliver your invoices because of bankruptcy or insolvency. You don’t face any losses from this factor.

However, you still have to ensure the factor is whole, even if you don’t use recourse to factor where your services don’t satisfy the client. In such situations, there is recourse with some aspects of the non-recourse factor.

Invoice Discounting

In invoice discounting, you use your invoices as collateral for loans instead of selling them. Typically, the face value of the invoice is provided after agreeing on the percentage to be deducted. Eventually, the invoice discounting is paid back through the factor that offers the invoice. Since non-notification factoring is involved, the agreement is confidential.

Non-Notification Factoring

Non-notification form of factoring is a type of factoring where your client does not receive any notification of what you agree upon with the factor. The relationship is kept private since the factor does more work, plus a non-notification relationship is costly compared to the one involved in factoring with full notification.

Most of the companies often think they’d prefer a non-notification form of factoring in the initial stages of using a factor only for them to realize that there’s no need since most of their clients don’t mind whether the invoices are factored.

Maturity Factoring

Here, the factor takes all the collection functions and credit to provide the owner with receivables insurance. However, you receive the advance once the due date of paying for the invoices reaches.

Payment of the fractured invoices may be made once a month to the seller on the due date. There are also cases where the client may extend payment terms according to how the factor and the client agree on who will be responsible. We rarely practice this form of factoring globally.

Conclusion

You need to identify your liabilities if you are thinking of getting yourself into any factoring agreement to avoid any problems with your clients. If there’s a contract involved, ensure you carefully go through it to get a clear picture of the whole arrangement.

Feivel Irwin

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