If the factoring transfers the receivable " with recourse", the factor has the right to collect the unpaid invoice amount from the transferor (seller). If the factoring transfers the receivable " without recourse", the factor (purchaser of the receivable) must bear the loss if the account debtor does not pay the invoice amount. The arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs.
INVOICE FACTORING FREE
Accordingly, the receivable becomes the factor's asset, and the factor obtains the right to receive the payments made by the debtor for the invoice amount, and is free to pledge or exchange the receivable asset without unreasonable constraints or restrictions. The sale of the receivable transfers ownership of the receivable to the factor, indicating the factor obtains all of the rights associated with the receivables. Invoice factoring is not a relevant financing option for retail or B2C companies because they generally do not have business or commercial clients, a necessary condition for factoring. Both invoice discounting and factoring are used by B2B companies to ensure they have the immediate cash flow necessary to meet their current and immediate obligations. This process is sometimes used in manufacturing industries when the immediate need for raw material outstrips their available cash and ability to purchase "on account". The seller sells the receivables at a discount to the third party, the specialized financial organization (aka the factor) to obtain cash.
The receivable, usually associated with an invoice for work performed or goods sold, is essentially a financial asset that gives the owner of the receivable the legal right to collect money from the debtor whose financial liability directly corresponds to the receivable asset. There are three parties directly involved: the factor who purchases the receivable, the one who sells the receivable, and the debtor who has a financial liability that requires him or her to make a payment to the owner of the invoice. The Scottish Law Commission reviewed this position and made proposals to the Scottish Ministers in 2018. Scottish law differs from that of the rest of the UK, in that notification to the account debtor is required for the assignment to take place. In the UK, the main difference between factoring and invoice discounting is confidentiality. In the UK the arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. It is therefore also not considered to be borrowing in the UK. However, in some other markets, such as the UK, invoice discounting is considered to be a form of factoring, involving the "assignment of receivables", that is included in official factoring statistics. Factoring is the sale of receivables, whereas invoice discounting ("assignment of accounts receivable" in American accounting) is a borrowing that involves the use of the accounts receivable assets as collateral for the loan. In the United States, Factoring is not the same as invoice discounting (which is called an assignment of accounts receivable in American accounting – as propagated by FASB within GAAP). The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries.
Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable.
Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter.
A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.
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