Factoring

Non-recourse and recourse

In non-recourse factoring the factor assumes the default risk. The receivable leaves the balance sheet, total assets fall and the equity ratio rises. In recourse factoring the risk stays with the company; in accounting terms that is a loan, not a shortening of the balance sheet.

The difference is not a formality: only the non-recourse variant improves the ratios that banks and covenants depend on.

What it costs

The price has three parts: a factoring fee on revenue for the service, interest on the advanced amount for the actual period, and – in non-recourse factoring – a premium for assuming the risk. A retention of typically 10 to 20 percent is released only once the customer has paid.

The right comparison is with an overdraft facility, not with zero. Factoring is usually more expensive than a credit line – but it scales with revenue instead of being capped at an amount.

When it pays

• Fast growth, where working capital rises faster than the credit line.
• Long payment terms towards large customers that cannot be renegotiated.
• Balance sheet presentation before a cut-off date, ahead of a funding round or a bank review.
• When the credit line is exhausted and no further collateral is available.

When it does not

With a few very large customers and high concentration, factors often decline or charge a premium. Where contracts involve acceptance, partial delivery or retentions, the receivable is hard to sell. And where the cause of the pressure is a self-inflicted DSO – late invoicing, no dunning – factoring buys time without solving the problem, and costs margin permanently for it.

Disclosed or undisclosed

In a disclosed arrangement the customer learns of the sale and pays the factor. In an undisclosed arrangement the assignment stays hidden. The undisclosed variant is more expensive and offered only to strong credits – it makes sense where the customer relationship would suffer from the signal.