What is factoring

Factoring is a commercial operation in which a commercial entity sells its receivables (on invoices) from customers to a third party in exchange for immediate payment, which is generally less than the nominal invoiced value of the receivables.

It allows the business to quickly liquidate its receivables to meet its current and immediate cash needs.

The economic meaning of the operation is to release the working capital of the company, “frozen” in receivables on unpaid invoices, and to be reinvested in the current activities of the company.

Factoring according to the definition in item 11 of § 1 of the additional provisions of CITA is a transaction for transfer of one-time or periodic cash receivables arising from the supply of goods or services, regardless of whether the person who acquired the receivables (factor) assumes the risk of collection of these claims for remuneration.

Factoring transactions are also the subject of the activity of banks and non-bank financial institutions.
The factoring transaction contract is bilateral, remunerative and long-term and contains elements of the assignment agreement and the service contract. The factoring relationship includes three parties:

• an enterprise that sells goods or services with deferred payment;
• enterprise – buyer of goods or services, which is a payer under a transaction with the enterprise seller;
• factor – a person (bank, non-banking institution, enterprise) who acts as an agent, undertaking the obligation to collect the receivable from the buyer payer and to provide it to the seller.

Types of Factoring

Overt and covert factoring

In open factoring the debtor of the transaction, in the person of the buyer, is informed about the transfer of receivables and he makes the payment directly to the factor.

In the case of hidden factoring, the buyer is not notified of the factoring operation and pays the amount due to the seller, and the seller receives the specified amounts.

Real and non-real factoring

In the actual factoring the factor assumes the risk by buying the receivables without the right of recourse against the seller of the goods and services.

In non-essential factoring, the seller remains a regressive debtor and is potentially exposed to claims by the factor for payment of amounts due on receivables.