What is factoring? Factoring with recourse

Factoring is a range of financial services provided by a bank or financial company to suppliers operating on a deferred payment basis. A company providing such services is known as a ‘factor’. There is a vast range of factoring types, and they all differ in terms of the level of risk borne by the factoring company. One type of factoring is recourse factoring.

Features of recourse factoring

In international practice, factoring has been used quite successfully since the 1960s. In Ukraine, this market is relatively young, with factoring services first becoming available in the 1990s. However, factoring services are now used across all sectors of domestic business in modern Ukraine.

Factoring with recourse is very popular today. Its distinctive feature is that the bank or financial company (factor), which acts as an intermediary between the supplier of goods or services and the buyer (debtor), acquires from the client (supplier) all rights to collect the receivable from the debtor. However, if, for any reason, the buyer (debtor) fails to pay the receivable, the client (supplier) who has assigned the debt is obliged to repay the funds to the factoring company.

Step-by-step factoring diagram

• The supplier delivers goods or services to the buyer on deferred payment terms;
• The factoring company, to which the supplier has assigned the rights to the receivable, pays the supplier 70–95% of the total amount owed by the buyer;
• The buyer (debtor) pays the receivable;
• The factoring company recovers the full amount plus interest for its services; the remaining funds are paid to the supplier;

Factoring benefits all three parties involved.

The supplier benefits from rapid capital turnover, increased competitiveness and higher revenue. The buyer’s main benefits include deferred payment, the absence of financial risk, and growth in profits and customer base. The factoring company earns its income from commissions without taking any financial risk.

With knowledge and information about factoring schemes, it is not difficult to determine whether they are suitable for your business or not. It is important to note that if goods are supplied very frequently and the payment schedule is quite tight, factoring may prove problematic.

You can order our factoring service by giving us a call. We structure our operations to ensure our services are of maximum benefit to you.