In this service, the Factor purchases the open account sales invoices of the Seller, provides them up front funds and collects payment from the Buyers when the debt falls due. The Factor maintains the sales ledger by chasing debtors, sending regular statements of account, allocating received payments and reporting transaction histories and balances.
Recourse factoring arrangements are usually operated on a disclosed basis, so the Buyers are aware of the Factor’s involvement. A Notice of Assignment is placed on the Seller’s sales invoice instructing customers to make payment directly to the Factor.
Recourse factoring involves making a purchase prepayment to the Seller at an agreed percentage (typically 75-95%). The term ‘Recourse’ means that the Factor as legal owner can re-sell the receivable back to the Seller. Accordingly, the Seller may still be at risk should its Buyer become insolvent or cease to trade.
The debt is usually funded for a pre-agreed period, typically 90 days after the invoice due date. If not paid at the end of this period, the prepayment may be withdrawn. In practice this is typically achieved by deduction from later prepayments from more recent invoicing or from payments received from other Buyers.
Sellers retain responsibility for their own credit assessments and and choice of Buyers with which they do business, but this will typically be done with the advice and support of the Factor (which will have access to credit information sources and can advise appropriately).
The Seller has to ensure that the invoice is payable in full; if there is a dispute on an assigned invoice, it will agree to repay the advance payment already received.
Sometimes the Seller may have a Credit Insurance policy in place that protects against bad debts. In this situation, the benefit of the policy is then assigned to the Factor (who legally owns the insured receivables). In this case the With Recourse Factoring + credit insurance is very similar for the Seller to the Non-Recourse Factoring approach.