Trade Finance- Factoring


Factoring is one of the popular method used by business to improve their working capital requirements

This type of finance is referred as debtor finance in which business sells its accounts receivable(invoices) to third party and it is referred as factoring at discounted rate.

A business sometimes need of cash instantly- Inorder to meet the cash needs business will sometimes factor its receivables assets to meet the present


Factoring is sale of receivables to third party - complete selling of accounts receivable invoice
Invoice discounting on the other hand refers borrowing that involves use of accounts receivable assets as collateral of loan

Three parties involved in factoring
1. factor one who purchases receivable
2. one who sells the receivable
3. debtor who is liable of payment for goods and services rendered

Example
Entrust DataCard sells card printing solutions to Bank of America and raised commercial invoice value of $500,000 USD and invoice due date is 180 days from the goods sold out

Assume that Entrust requires cash flow to improve working capital. Entrust can sell of their accounts receivable to third party(banks or finance institutions) to get the invoice paid before its due date at nominal interest expenses/fees paid

Third party will fund off seller and collect the money from the debtor once invoice reach by its due date. This scenario is referred as factoring..

There are two types of factoring-
with recourse - Third party has rights to collect unpaid invoice amount
without recourse- Third party has to bear the losses if invoices are unpaid by debtor


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