Factoring: <br>The Main Actors in a Factoring Transaction

A factoring transaction normally involves three actors:

1. The buyer of goods
2. The seller of the goods
3. The factor

These parties interact during the sale.

The Buyer of Goods:

• Negotiates the terms and conditions for purchase on credit with the seller
• Receives the goods, an invoice, and detailed instructions from the seller to pay the factor on the due date
• Pays the factor on time or requests an extension
• Is liable to legal action by the factor for past-due payments

The Seller of Goods

• Receives the purchase order for goods on credit from the buyer
• Signs a sales contract with the buyer, including the terms and conditions
• Sells the buyer goods on credit, providing a copy of the invoice with the goods, with detailed instructions to make payment to the factor on the due date (these are now receivables)
• Sells the receivables to the factor and receives 80% or more in advance payment
• Receives the balance payment from the factor, minus service fees

The Factor

• Signs a contract with the client (seller) to provide collection of receivables and other factoring services
• Usually pays 80% or more of the invoice amount to the client (seller) in advance
• Provides factoring services to the client (seller)
• Receives payments from the buyer on due dates and makes the balance payment to the client (seller) after deducting all service fees

When the seller of goods and the buyer are not located in the same country, we talk about international factoring. In such cases, there are four actors involved:

1. The buyer of goods
2. The seller of goods
3. The export factor (domestic factor)
4. The import factor (factor abroad)

The roles of the buyer and the seller are as above.   

The Export or Domestic Factor

• Signs a contract with the client (seller) to provide collection of receivables and other factoring services
• Cedes receivables to the factor abroad, i.e. in the buyer's country
• Usually pays 80% or more of the invoice amount to the client (seller) in advance
• Provides factoring services to the client (seller)
• Receives payments from the factor abroad on due dates and pays the balance payment to the client (seller), after deducting all service fees

The Import Factor or Factor Abroad

• Informs the customer (buyer of goods) that the receivables have been assigned
• Receives payments from the buyer of goods on the due date and transfers money to the domestic factor's account (after deducting a service fee)