In Chapter 3, when they're talking about short-term borrowing from banks (term loans, revolving credit, international bank loans, bridging loans and evolving credit), factoring is also mentioned. I remember the term from CT2 but can't remember what it means. Can someone tell me what factoring is about please?
There are two types of Factoring: Factoring is a method of improving cashflows. There are three parties: The Invoiced party The Factor The Seller. i.e. the person who has sent the invoice. so, the seller has a bill of how much the invoiced party owes them. it takes it to the factor and gives the bill to him in exchange for money now less charges. the factor then contacts the invoiced party and asks them to settle the bill with the factor. Recourse and Non Recourse factoring: Recourse Factoring: A tradeable invoice where the factor has access to the sellers assets if the party on the invoice does not honour its commitment to pay the money to the factor of the invoice. i.e factor does not take on the risk of bad debts. The buyer buys the invoice at a discounted price, as the seller requires the money immediately. Non Recourse: Same as above except that the factor takes on the risk for bad debts. Usually cheaper.
Oops, be careful. Actually, as the factor is assuming the bad debt risk, non-recourse factoring would normally be more expensive.
