Receivables Financing, or more commonly known as Factoring, is a financial solution that enables companies to access funding by selling their accounts receivable (invoices) to a third party, known as the ‘factor.’ The factor pays the company 80-90% of the invoice amount right away. Once the customer pays the factor, the remaining funds are sent to the company, subtracting any previously agreed fees.
Factoring provides a valuable solution for small and medium enterprises (SMEs) to access working capital, as well as a way to manage their accounts receivable and reduce the risk of default. By selling their invoices, these businesses can access cash quickly, which can be used to meet their short-term working capital needs.
Factoring with or without recourse is a financing arrangement where a business sells its invoices to a factoring company for immediate cash, with the key difference being who bears the credit risk of non-payment: with recourse, the business must reimburse the factor if the customer doesn’t pay; without recourse, the factor assumes the loss (typically only in cases of debtor insolvency), making it more costly but offering protection from bad debt.