Factoring is the most popular form of financial service when it comes to receivables management and open account trade financing. Its growth in the past 5-6 years is more than three times that of letters of credit. Europe has a dominant market share of use, with Asia having the fastest growing market share.
Definition: A form of receivables purchase, in which sellers of goods and services sell their receivables (represented by outstanding invoices) at a discount to a finance provider (commonly known as the ‘factor').
A key differentiator of factoring is that typically the finance provider becomes responsible for managing the debtor portfolio and collecting the payment of the underlying receivables.
(Source: Standard Definitions for Techniques of Supply Chain Finance, 2016: BAFT, Euro Banking Association (EBA), Factors Chain International (FCI), International Chamber of Commerce (ICC) International Trade and Forfaiting Association (ITFA))
The origins of factoring can be traced back to business dealings in England as early as the 1400's. Around 1620, it was introduced to the Americas by the Pilgrims and grew as an effective means for companies to increase their cash flow.
FCI (Factors Chain International) and IFG (International Factors Group) have been the two main global organisations offering a network of leading factoring companies. In 2016, FCI announced that the activities of IFG were being integrated into FCI. Today, FCI has more than 400 members located in 90 countries.
What is a factoring company?
A company, very often a division of a bank, that specialises in financing invoices for companies that have cash flow problems due, in the main, to slow paying clients.
A factor does not lend money. It purchases the receivable at a discount. A factor earns its income when the buyer pays the invoice in full and its fees and interest are deducted from the final payment to the seller.
Some factors may offer financing for all industries, whereas others will specialise in specific industries only.
More comprehensive information can also be found in the Factoring training module at www.tradefinance.training