What is factoring?

Factoring is a comprehensive financial service model in which the seller transfers his current or future accounts receivable to the factor (a financial institution providing factoring services) based on the goods sales/service contract concluded with the buyer, and the factor provides a series of services such as financing, buyer's credit evaluation, sales account management, credit risk guarantee and account collection.

It is the behavior of the seller to entrust a third party to manage accounts receivable in order to strengthen the management of accounts receivable and enhance liquidity when the payment is settled by collection or credit in commercial trade.

A financial service model in which a company transfers its accounts receivable to a factoring company without recourse, and it acts as a principal creditor rather than an agent. Accounts receivable are sold without recourse, which means that when the accounts cannot be recovered, the bill discounter cannot pursue the seller.

Extended data

In practice, there are many different ways to operate factoring business. Generally (but under special circumstances), it can be divided into: recourse factoring and non-recourse factoring; Explicit factoring and implicit factoring; Discount factoring and maturity factoring:

1. Discount of bills with recourse

Recourse factoring means that the supplier transfers the creditor's rights of accounts receivable to the bank (that is, the factor). After the supplier receives the payment, if the buyer refuses to pay or is unable to pay, the factor has the right to recover from the supplier and demand repayment of the prepaid monetary funds.

Considering the principle of prudence, in order to reduce the possible losses in the future, banks usually provide customers with factoring with recourse.

2. Non-recourse factoring

On the other hand, factoring without recourse bears the risk that the buyer refuses to pay or is unable to pay. After the supplier and the factor carry out the factoring business, it is equivalent to transferring all the risks to the bank. Because the risk is too high, banks generally don't accept it.

3. Ming Bao Li

Explicit factoring and implicit factoring are distinguished according to whether the factoring business is notified to the buyer. Explicit factoring means that the supplier should immediately inform the buyer of the factoring situation when the creditor's rights are transferred, and instruct the buyer to pay the goods directly to the factor.

The factoring business carried out by domestic banks is Ming factoring.

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