What Are the Different Types of Factoring?
Start-up recruitment firms may find it difficult to obtain customary loans, mostly because they lack stability. Customers can take up to 90 days, sometimes even more, to settle their payments. Because of this, businesses are sometimes unable to pay their employees on time. Factoring is a great way to fill this gap as it provides instant cash to recruitment firms.
There are numerous types of factoring. A few of the main types of factoring are discussed below:
- Recourse and Non-Recourse Factoring
With recourse factoring, the factoring firm turns to the business if the customer does not pay on time. Thus, the risk of bad invoices remains with the businesses itself, and the factoring firm does not undertake any risk. The factoring firms do offer the service of receivable collections, but they do not cover the risk of the customer not paying the debt on time. The recruitment factoring firm often recovers the funds from the businesses in such circumstances.
With non-recourse factoring, the factoring firm undertakes the risk of non-payment by customers. Thus, the factoring firm is not eligible to ask for payments from the business on this basis. The commission fee charged for non-recourse factoring is more than it is for recourse factoring. Since the factoring firm assumes the risk of non-payment by the customers, this additional fee is charged.
- Domestic and Export Factoring
There are three parties involved in domestic factoring: the business, the factoring firm, and the customer. However, with export factoring four parties are involved: the business, the factoring firm, the customer, and the factoring firm abroad.
With domestic factoring, all parties are available in the same country and the factoring firm mediates between the business and the customer. With export factoring, two factoring firms are involved, so it is also sometimes referred to as a two-factor system.
- Disclosed and Undisclosed Factoring
With disclosed factoring (also known as factoring with notification), the business notifies the customers about the name of the factoring firm on the invoice and informs the customers to make their payments to the factoring firm itself.
With disclosed factoring (also known as factoring without notification), the business does not notify the customer about the factoring firm, so the name of the factoring firm is not revealed on the invoice. Moreover, under undisclosed factoring the factoring firm retains control and provides short-term cash against invoices, but the transactions take place in the name of the business.
- Full and Limited Factoring
With full factoring (also known as old line factoring, or conventional factoring), the factoring firm offers all services, including credit control, collection, sales ledger, and credit insurance, to the business. The factoring firm can also offer additional services in accordance with the requirements of the business, like maintaining accounts and bill collection. Usually, factoring firms provide full factoring with recourse for good businesses. With limited factoring, the factoring firm selects a restricted number of invoices to deal with.
Nowadays, many businesses are using factoring to improve their cash flow and to prevent any hindrances caused by late-paying customers.