Factoring: How Factoring Works

Domestic Factoring

Factoring business is generated by sales on credit in the normal course of business. When a transaction takes place, it is the factor's role to realize the sales, which is to say to collect receivables. The factor acts as an intermediary between the seller and the buyer.

1. A potential buyer of goods forwards a sales request to a seller.
2. The seller (client) submits a request to the factor to purchase the account receivable.
3. The factor checks the buyer's creditworthiness.
4. If the factor is satisfied with the information obtained, the factor approves the transaction.
5. The seller sends the good, together with an original invoice to the buyer. This invoice usually includes instruction to the buyer to pay the invoice (comprehensive payment details to make payment directly to the factor assigned the job of collecting receivables).
6. The client also sends a copy of the original invoice to the factor.
7. After receiving the invoice copy, the receivables are transferred to the factor in accordance with the factoring contract. At the same time, the factor makes a credit line available (usually 80% of the invoice value), and the client can access this money immediately. Factors usually approve financing after receiving the invoice. The factor takes a commission on the total amount (e.g. 1.2% of the invoice amount).
8. On the due date (e.g. after 60 days), the buyer pays the invoice in full to the factor. If payment is late, the factor initiates collection from the buyer. In case of continual non-payment, it is usually the factor that initiates legal proceedings for collection. With recourse factoring, the factor may reclaim any receivables remaining uncollected from the client. With non-recourse factoring, the factor assumes the loss (which may be protected against by the factor's credit insurance).
9. The customer pays the invoice in full to the factor, which transfers the balance owing to the client's account, after deducting all fees, interest, charges, etc. as agreed.

International Factoring

When the seller and the buyer are not located in the same country, we talk about international factoring.

1. The seller of goods or exporter sells and delivers goods to the customer-importer and sends an invoice.
2. The seller of goods cedes the accounts receivable to a domestic factor with a copy of the invoice and other documents proving their existence.
3. The domestic factor cedes the accounts receivable to the factor abroad, i.e. in the buyer's country.
4. The factor abroad informs the customer that the accounts receivable have been assigned.
5. The domestic factor usually covers at least 80% of the invoice in advance.
6. On the due date, the buyer pays the invoice to the factor abroad, which transfers the money to the domestic factor's account, minus service fee.
7. The domestic factor receives payment from the factor abroad on the due dates and pays the balance owing to the client (seller), minus all service fees.