Document

Types of Invoice and Receivables Factoring

By Annapoorna

|

Updated on: Dec 22nd, 2022

|

4 min read

social iconssocial iconssocial iconssocial icons

Factoring can take many forms based on the different services and agreements between the business and the factor. A factor buys unpaid invoices from a business and deducts a factoring fee once the customer pays the complete amount. Examples of invoice factoring include recourse and non-recourse factors, advance and maturity factors, bank participation factors, supplier guarantee factors, and disclosed and undisclosed factors.

Meaning of invoice and receivable factoring

As a form of invoice finance, invoice factoring involves selling some or all of your company’s outstanding invoices to a third party to improve your cash flow and revenue. It is a type of alternative financing. Using it, small businesses can release the cash value of their invoices before their customers pay them. Working capital can be obtained by factoring in receivables.

Types of invoice factoring

Disclosed Factoring

The fact that the business has opted for factoring arrangements in disclosed factoring is also made known to the customer. Since the customers know the factoring arrangements, they are instructed to pay dues to the factor. It is also known as notified factoring.

Non-disclosed Factoring

In this case, the business opts for a factoring arrangement with a third party but does not inform the customer of such an arrangement. Based on the terms and conditions set out in the agreement between the business and the factor, the business would accept the payments from the customers and then remit them to the factor later.

Suppliers Guarantee Factoring

Supplier guarantee factoring is a three-party agreement that includes the supplier of the borrower as an additional party. Factoring the invoices generates funds that are paid directly to the supplier. The supplier, in this case, supplies raw materials for a large order. A factor deducts the fees and charges from the payment made by the customer on the due date and remits the profit to the client.

Bank Participation Factoring

For businesses where every rupee matters, this type of factoring is ideal. The bank finances the entire arrangement, including the margin to be paid to the factor.

Full Factoring

Here, the factor provides services ranging from maintaining a sales ledger to credit control, creating credit limits, and protecting the business from bad debts by opting for credit insurance, thus covering all aspects with regard to factoring. In providing all these services, the factor allows the business to carry on operations easily and without loss of business resources. Since a host of services is covered, the fee to be paid to the factor will be on the higher end of the spectrum.

Advance Factoring

For a business in dire need of cash, advance factoring is the ideal choice. Under this arrangement, up to 90% of the invoice value is paid as advance to the business by the factor within a couple of days of submitting the invoices. The remaining amount will be paid to the business once the factor has received the payment from the customer on the due date. The factor also charges his fee as a discount in the amount paid as an advance.

Maturity Factoring

In this case, the focus of the factor is mainly the collection of the dues from the customer. The factor, on collecting the dues from the customer on the specified due date, will pay the amount received to the business. The due date is usually fixed in advance.

Domestic Factoring

Domestic factoring ideally involves three parties within the same domestic territory: the factor, the seller and the buyer. The services provided by the factor, including the management, funding and collection duties, will all be provided within the domestic confines of a country.

Cross-Border Factoring

Cross-border factoring would involve four parties: the exporter, the importer, the export, and the import. Where the services of management funding and collection of receivables are done in international markets, it shall be termed cross-border factoring.

Recourse Factoring

In this case, the business takes on the credit risk of its customer (with regard to non-payment). The risk does not fall on the factor. In this case, the factor’s role is quite literally limited to financing and debt collection. Since the factor bears no risk, the charges levied will be limited to interest charges and an associated service charge.

Non-Recourse Factoring

Here, the credit risk is borne by the factor, not the business. Since the factor bears the credit risk, the charges for the services provided will be relatively higher. Where the customer fails to pay the money to the factor, the business assumes no responsibility for repayment.

Conclusion

Small businesses, startups and MSMEs would find invoice factoring as the best financing option for quickly arranging funds.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

Index

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption