Factors
When initially contacted by a prospective invoice seller, the factor first establishes whether or not a basic condition exists, does the potential debtor(s) have a history of paying their bills on time? That is, are they creditworthy? (A factor may actually obtain insurance against the debtor’s becoming bankrupt and thus the invoice not being paid.) The factor is willing to consider purchasing invoices from all the invoice seller’s creditworthy debtors. The classic arrangement which suits most small firms, particularly new ones, is full service factoring where the debtor is notified to pay the factor (notification) who also takes responsibility for collection of payments from the debtor and the risk of the debtor not paying in the event the debtor becomes insolvent; i.e., nonrecourse factoring. This traditional method of factoring puts the risk of non-payment fully on the factor, except if the reason for the factor's failure to collect is not related to the financial inability of the account debtor to pay, the sole risk assumed by a nonrecourse factor. If the debtor cannot pay the invoice due to insolvency, it is the factor's problem to deal with and the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and often turns away average credit quality customers. The cost is typically higher with this factoring process because the factor assumes a greater risk and provides credit checking and payment collection services as part of the overall package. For firms with formal management structures such as a Board of Directors (with outside members), and a Controller (with a professional designation), debtors may not be notified (i.e., non-notification factoring). The invoice seller may not retain the credit control function. If they do then it is likely that the factor will insist on recourse against the seller if the invoice is not paid after an agreed upon elapse of time, typically 60 or 90 days. In the event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is typically the lowest cost for the seller because they retain the bad debt risk, which makes the arrangement less risky for the factor.
Despite the fact that most large organizations have in place processes to deal with suppliers who use third party financing arrangements incorporating direct contact with them, many entrepreneurs remain very concerned about notification of their clients. It is a part of the invoice selling process that benefits from salesmanship on the part of the factor and their client in its conduct. Even so, in some industries there is a perception that a business that factors its debts is in financial distress.
There are two principal methods of factoring: recourse and non-recourse. Under recourse factoring, the client is not protected against the risk of bad debts. On the other hand, the factor assumes the entire credit risk under non-recourse factoring i.e., full amount of invoice is paid to the client in the event of the debt becoming bad. Other variations include partial nonrecourse, where the factor's assumption of credit risk is limited by time, and partial recourse, where the factor and its client (the seller of the accounts) share credit risk. Factors never assume "quality" risk, and even a nonrecourse factor can chargeback a purchased account which does not collect for reasons other than credit risk assumed by the factor; for example, because the account debtor disputes the quality or quantity of the goods or services delivered by the factor's client.
Read more about this topic: Factoring (finance)
Famous quotes containing the word factors:
“The economic dependence of woman and her apparently indestructible illusion that marriage will release her from loneliness and work and worry are potent factors in immunizing her from common sense in dealing with men at work.”
—Mary Barnett Gilson (1877–?)
“Language makes it possible for a child to incorporate his parents’ verbal prohibitions, to make them part of himself....We don’t speak of a conscience yet in the child who is just acquiring language, but we can see very clearly how language plays an indispensable role in the formation of conscience. In fact, the moral achievement of man, the whole complex of factors that go into the organization of conscience is very largely based upon language.”
—Selma H. Fraiberg (20th century)
“Girls tend to attribute their failures to factors such as lack of ability, while boys tend to attribute failure to specific factors, including teachers’ attitudes. Moreover, girls avoid situations in which failure is likely, whereas boys approach such situations as a challenge, indicating that failure differentially affects self-esteem.”
—Michael Lewis (late–20th-century)