Factoring: Types of Factoring

There are a number of types of factoring in both theory and practice.  They depend on the relation between the main actors in the factoring operation. Some basic data on factoring are given below:

Recourse and Non-recourse Factoring

In recourse factoring, the factor turns to the client (seller), if the receivables become bad, i.e. if the customer does not pay on maturity. The risk of bad receivables remains with the client, and the factor does not assume any risk associated with the receivables. The factor provides the service of receivables collection, but does not cover the risk of the buyer failing to pay the debt. The factor can recover the funds from the seller (client) in the case of such default. The seller assumes the risks associated with the credit and the buyer's creditworthiness. The factor charges the seller for the management of receivables and debt collection services, while also charging interest on the amount advanced to the client (seller).

In non-recourse factoring, the factor assumes the risk of non-payment by the client's customers. The factor cannot demand any outstanding amount from the client (seller). The commission or fees charged for non-recourse factoring services are higher than for recourse factoring. The factor assumes the risk of non-payment on maturity and consequently takes an additional fee called a del credere commission.

Domestic and Export Factoring (see more under 3. How Factoring Works)

Domestic and export factoring differ in the number of parties involved. In domestic factoring three parties are involved (the seller, the buyer, and the factor), while in export factoring there are four (the seller, the buyer, the domestic factor, and the factor abroad).

In domestic factoring, the factor mediates between the seller and the buyer. All three parties are located in the same country.

Export factoring is similar to domestic factoring, except there are four parties involved. There are consequently two factors involved in the transaction, and it is referred to as the two-factor system of factoring.

Disclosed and Undisclosed Factoring

In disclosed factoring (factoring with notification), the seller notifies the buyer of the factor's name in the invoice, telling the buyer to make payment to the factor on due date. Disclosed factoring can be on the basis of either recourse or non-recourse factoring.

In undisclosed factoring (factoring without notification), the seller does not notify the buyer of the existence of the factoring deal, so the name of the factor is not disclosed on the invoice.  In undisclosed factoring, the factor nonetheless retains control, maintaining the seller's sales ledger and providing short-term finance against sales invoices, even though the transactions take place in the name of the seller.

Full Factoring and Limited Factoring

In full factoring, the factor provides almost all the services: collection, keeping the sales ledger, credit control and credit insurance. This is also known as Conventional Factoring or Old Line Factoring. The factor can also provide other services based on client requirements: maturity-wise bill collection, keeping accounts, advance granting of limits to a limited discounting of invoices on a selective basis. Factors usually provide full factoring with recourse for good companies.

In limited factoring, the factor chooses a limited number of invoices to be the subject of the factoring agreement with the client (seller).