Factoring with recourse is now the standard type of factoring facility whereby the factoring company will advance funds against sales invoices as and when they are raised but the company accepts the credit risk in the event of the failure of his customer and will have to repurchase the invoice in the event of that happening. There is a notice of assignment on each invoice stating that it has been assigned to ABC Factors Ltd and that payment should only be made to them
Factoring without recourse is where the factoring company assumes the credit risk in the event of the failure of the customer. The factor will assign each customer a credit limit and will accept the credit risk up to that limit. Often they will refuse to fund any invoices in excess of the credit limit which can mean problems for their clients’ cash flow, especially if the credit limits are unreasonably low.
In both cases the factor carries out the administration of the sales ledger and is responsible for the collection of overdue debts and this should result in savings in overheads as well as the prime purpose of increasing liquidity.
Another type of factoring facility was originally called Agency Factoring but now referred to by the far more cumbersome title of “Client handles own collections” and generally abbreviated to CHOCS. This tends to be used by companies with a larger number of customers and is fully disclosed with payments still made to the factoring company but the client will handle all of the administration and credit control.
The theory behind factoring is simple but unfortunately it often isn’t as straightforward as it should be and as we have serious reservations with the way that a number of factoring companies operate we have set out some of the pitfalls including why factoring companies often offer a poor service
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