Factoring

A trade finance mechanism whereby an exporter sells its export receivables (bills of exchange or promissory notes, or simply issued invoices, which the exporter is selling on an open account basis) at a discount. The company purchasing the receivables is called a factor. Factors are normally specialized Financial Services Companies, but many are owned by banks. Normally, after the factor has purchased a receivable, the importer or buyer pays the factor directly.

Some factors actually issue the invoices to buyers and in effect, operate the exporter’s sale ledgers. Some factors operate on a non-recourse basis i.e. they assume the risk of non-payment. Less frequently, the factor will take recourse to the exporter for all or part of the sums involved in the event of non-payment or delayed payment by the buyer.