Factoring Market
The factoring market represents approximately $1.5 trillion in transactions annually worldwide and is approximately $150 billion in annual transactions in North America and growing each year. Factoring is used in almost every industry that sells business-to-business or business-to- government supplies and services.
Factoring transactions are not loans and differ from borrowing in that a company will “sell” its accounts receivable (invoices) at a discount to their face value.
Factoring Transactions
Many Manufacturers that sell to large commercial clients (Retailers) can develop cash flow problems because of the payment terms (30, 60 and 90 days) as a result they are required to wait months for payment for their products/services. The delay can cause stress to a Manufacturer’s operations, the ability to process new orders and pay expenses including: payroll, raw materials, suppliers and rent and capital expenditures.
Generally Manufacturer’s don’t have sufficient credit and collateral to secure a loan to cover cash flow deficiencies created.
Manufacturers can use their invoices (accounts receivable) as credit to secure a factoring transaction. Factoring allows a Manufacturer to finance its invoices based on the credit strength of the Retailers (the clients of the Manufacturer).
To arrange a factoring transaction, Manufacturer’s enter into a financial arrangement with a Factor. The Factor purchases the Manufacturer’s accounts receivable (invoices) at a discount and advances a portion of the proceeds to the Manufacturer. The Factor is a financial intermediary and assumes the financial risk to collect the face value of the Invoices (accounts receivable) from the Retailer.
Credit Receivables Insurance
Credit Receivables Insurance is an insurance policy and a risk management product which a Factor can purchase to assist in protecting the Credit Receivables (Invoices) purchased from the Manufacturer as a result of loss due to credit risks such as protracted default, insolvency or bankruptcy of the Retailer. It is important to note that Credit Receivables Insurance applies to the Retailer and not to the Manufacturer.
Eligible Credit Receivables
The Factor will generally refer to the purchased accounts receivable (Invoices) as Eligible Credit Receivables. The Eligible Credit Receivables represent assets of the Factor.
Credit Receivables constitutes an investable asset and is defined as an “instrument” or “intangible” under the Uniform Commercial Code (“UCC”) in the United States and the Personal Property Security Act (“PPSA”) in Canada.